Morningstar assigns a ‘buy’ recommendation for Estée Lauder (NYSE: EL), a premium beauty giant, with a fair value estimate of USD 162 per share. Despite challenges, including weakness in China and a global slowdown in travel retail, Morningstar sees Estée Lauder as undervalued at its recent trading price of USD 68.94. With a wide economic moat, strong brand equity, and effective cost management, Estée Lauder remains strategically positioned for long-term growth, even as it faces near-term revenue hurdles.

Valuation and Strategic Price Levels

1. Fair Value Estimate and Current Market Levels

Fair Value Target: USD 162, presenting a strong upside from its current trading price.
Current Price (as of October 31, 2024): USD 68.94, a 57% discount to fair value, creating a compelling entry point for value-focused investors.
2. Key Price Levels for Investors

Support Level: USD 60, where market interest could stabilize in the event of continued macroeconomic headwinds.
Resistance Level: USD 80, reflecting a likely rebound target if key markets, particularly China, show signs of recovery.

Financial Performance and Operational Insights

1. Quarterly Performance and Margins

Revenue Insights: For Q1 2025, Estée Lauder reported $3.4 billion in sales, in line with projections, but with notable declines in high-margin skincare sales due to weakening demand in China.
Gross Margin Expansion: Despite the sales dip, gross margin increased by 280 basis points to 72.4%, driven by effective inventory management and manufacturing efficiencies.
2. Long-Term Profitability Outlook

Projected Sales Growth: Morningstar anticipates 6% annual sales growth over the next 10 years, led by the skincare and fragrance segments.
Operating Margins: Expected to improve to 17% by 2034, as Estée Lauder focuses on high-margin channels and manufacturing cost savings.

Competitive Edge and Strategic Positioning

1. Strong Brand Portfolio and Market Leadership

Wide Economic Moat: Estée Lauder’s portfolio includes category leaders like La Mer and MAC, securing it a leading share in premium skincare and cosmetics.
High Customer Loyalty: With a premium brand positioning, Estée Lauder enjoys low price elasticity, contributing to steady revenue streams despite market fluctuations.
2. Expansion in Key Markets and Digital Channels

Asia-Pacific Focus: Estée Lauder’s innovation centers in China and Japan are expected to support product localization, crucial for growth in Asia, which represents a large portion of premium beauty spending.
Digital Channel Investments: With 28% of revenue from digital sales, Estée Lauder is committed to expanding its online reach, aligning with evolving consumer preferences.

Risks and Investor Considerations

1. Exposure to Market Cyclicality

Geopolitical and Economic Risks: The firm’s focus on premium segments makes it vulnerable to consumer spending shifts, particularly in China.
Supply Chain Dependency: Any disruptions in global trade policies or manufacturing could affect Estée Lauder’s delivery capabilities.
2. Capital Allocation and Dividend Policies

Capital Allocation Rating: Standard, with a balanced approach to growth investments, shareholder returns, and acquisition-led expansion.
Dividend Adjustments: The recent 47% reduction in dividend highlights management’s focus on preserving cash flow amidst a slow growth phase.