Key insights
- The author believes Estee Lauder (EL) is poised for significant stock appreciation due to a potential rebound in ROIC driven by recovering earnings and efficient capital management. They argue current analyst estimates are conservative, particularly regarding gross margins and EPS growth. A faster-than-expected return to pre-COVID performance could lead to substantial gains, with a potential price target of $150 within 3 years.
Estee Lauder has a long history of double digit ROIC. The C in ROIC stand for Capital. Capital invested in the business has been declining for 3 years. Earnings have been as well as the entire luxury brand world suffered a collapse in Asian demand.
What happens when the numerator in ROIC rebounds more quickly than the denominator? This is what is going to happen at EL over the next 12 months. While EL has never had a low PE in absolute terms, it has had 30-40% ROIC and it can do that again. I am not saying it will do it again, but it can and if it does, the stock will perform very well.
Current earning estimates assume a gradual improvement over the next 5 years, but not a return to the best period prior to COVID. Peak gross margins at EL were 80% in 2015/16. Analysts have modest gross margin expectations through 2030, climbing from 74.3% to 75.9%. EL could deliver that 2030 gross margin next year quite realistically.
Worst case, you have a company that will double earnings over the next 5 years. Even if the multiple shrinks to an unlikely 20x, that is a $100 in 2030 on what look like crazy conservative numbers. I suspect the company can deliver the $5 EPS 2 years earlier than 2030 which puts 2030 EPS closer to $8. That is a $150 stock in 3 years.