Estee Lauder's stock jumps as China loosens Covid rules, in line with Club investment case

Published Fri, Nov 11 20222:30 PM ESTUpdated Fri, Nov 11 20222:37 PM EST

Shares of Club holding Estee lauder (EL) climbed higher Friday after China relaxed Covid-19 restrictions for international travelers. The move validated our prediction that the cosmetics giant would see its stock recover as China gradually abandons its strict zero-Covid policy. Estee Lauder's stock was trading up roughly 4% in midday trading, at $227.56 a share, on news China reduced the amount of time foreign travelers need to quarantine upon arrival, to 5 days from 7 days. The New York-based company, which owns luxury beauty brands like La Mer, Mac and Jo Malone London, was also a beneficiary of Singles Day , an online shopping event in China on Friday. "We bought the stock because we felt that China would come back," Jim Cramer said Friday. Shares of Estee Lauder have been under pressure , as Beijing's draconian Covid-19 measures have severely squeezed China's economy for nearly 3 years. The stock is down 37.7% year-to-date. Analysts and investors have long identified China as an important growth market for Estee Lauder, which relies on the country for roughly 36% of its total revenue. The company's diverse portfolio of high-end brands has a "long-term fundamental trajectory" that's "highly promising" in China, analysts at Deutsche Bank wrote in a note Thursday. "Per capital spending on prestige beauty in China and other emerging markets has decades of outsized growth ahead," the analysts added. In a separate note this week, analysts at Credit Suisse said "Chinese women have become among the most savvy beauty consumers in the world." And Estee Lauder's investment in a new research and development center in Shanghai should "significantly improve its responsiveness to trends and speed to market in China," the analysts wrote in a note. Meanwhile, Wells Fargo (WFC) on Tuesday raised its price target on Estee Lauder to $225 from $215 on the back of an improvement in cosmetics- and duty-free imports to China . Bottom line Estee Lauder's stock jump today supported our investment thesis that the luxury beauty brand is the single best way to play China's reopening. While China's Covid lockdowns have been a headache, we think this is a transitory issue that could eventually turn into a tailwind for the company. China's growth has clearly been strained by the uncertainty of its Covid restrictions, but we were encouraged to see some progress today. We think these looser restrictions will increase travel and store traffic in Asia, which should be a major catalyst for Estee Lauder. We also see the company's focus on its direct-to-consumer channel as a tactical move. This segment has seen stable growth and be