Deutsche Bank upgrades Estee Lauder, says cosmetics stock will get a boost from China reopening in 2023

Published Tue, Dec 6 20226:58 AM EST

Buy shares of Estee Lauder as China starts to ease Covid restrictions, according to Deutsche Bank. Analyst Steve Powers upgraded shares to buy from hold, saying the higher likelihood Beijing will ease Covid restrictions in March or April raises confidence in the stock. "Although EL is likely to face challenges over the next several quarters, we see such difficulties as well telegraphed by recent guidance. Moreover, we believe recent developments in China give more credibility to category resurgence in that market/Hainan by CY2H23 (acknowledging potential parallel risks of US/ EU slowing)," Powers wrote in a Monday note. Shares of Estee Lauder came under pressure this year as the beauty company with a high exposure to China dealt with the country's strict Covid restrictions. The stock is down roughly 37% this year. Still, the analyst's $266 price target implies roughly 15% upside from Monday's closing price. The stock is up more than 1% in Tuesday premarket trading. The analyst expects that Estee Lauder's China business will recover after struggling in 2022. Estee Lauder is expected to have three additional distribution centers over the next half year, with one already open in Guangzhou, according to the note. Meanwhile, recent meetings with management also raised confidence in a makeup margin recovery after segment revenues return to pre-pandemic levels, according to the analyst. "Given our increased confidence in China/makeup prospects longer-term, we would be buyers on any weakness spurred by market/macro volatility in the near term," Powers wrote. The upgrade comes as part of a broader outlook on consumer staples, which the analyst has a more neutral view on after being positive on the sector in 2022. He expects that an improvement in some economic signals, such as the recent cooling in inflation data , will spur investors to pull back from the defensive names they piled into this year. The analyst also downgraded shares of General Mills and Spectrum Brands Holdings to hold from buy. Additionally, he downgraded shares of Kimberly-Clark and Boston Beer to sell from hold. —CNBC's Michael Bloom contributed to this report.