On Friday, Morgan Stanley (NYSE:MS) adjusted its stance on Estee Lauder (NYSE:EL) stock, downgrading the stock from Overweight to Equalweight and reducing its price target to $140 from $164. The move comes after a reassessment of the company's growth trajectory and market share challenges.
The downgrade reflects Morgan Stanley's revised expectations for the cosmetics giant's performance. Initially, the firm had considered Estee Lauder a compelling turnaround story, expecting significant improvements in profitability and earnings per share (EPS) due to its Profit Recovery Program (PRP). While the program is still anticipated to bolster profitability, the anticipated surge in sales has not materialized as forecasted.
Estee Lauder's short-term outlook had been more optimistic based on the assumption that the company would benefit from easier year-over-year comparisons and a resurgence in the travel retail channel. The expectation was that Estee Lauder would overcome its inventory issues in this sector and see a rebound in shipments.
Moreover, long-term growth was expected to be driven by increased investment through the Profit Recovery Program and enhanced innovation, which in turn would help Estee Lauder regain market share. However, the anticipated recovery in sales has been slower than expected.
The company's recent guidance indicates a significant high single-digit percentage drop in expected fourth-quarter sales compared to previous forecasts. Morgan Stanley also suggests that this downward trend in sales may extend into fiscal years 2025 and 2026, citing external economic risks, pressures within the beauty product category, and persistent internal challenges in Estee Lauder's market share.
InvestingPro Insights
In light of Morgan Stanley's recent downgrade of Estee Lauder, it is pertinent to consider some key metrics and insights from InvestingPro. Estee Lauder's stock has indeed taken a significant hit over the past week, with a price total return of -8.48%. This aligns with the concerns raised regarding the company's growth trajectory and market share challenges.
However, it's worth noting that Estee Lauder has demonstrated impressive gross profit margins, reported at 70.77% for the last twelve months as of Q3 2024. This is a testament to the company's ability to maintain profitability despite headwinds. Additionally, Estee Lauder boasts a commendable dividend yield of 1.96%, having raised its dividend for 29 consecutive years, which could be a sign of management's confidence in the company's financial health and commitment to returning value to shareholders.
Investors considering Estee Lauder may also wish to take into account that the company is trading at a high earnings multiple, with a P/E ratio of 71.59. This could suggest that the stock is priced optimistically relative to earnings, which is an important factor to weigh against the potential for future growth and earnings recovery.
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