Estee Lauder catches a couple Wall Street endorsements but we're still skeptical

Published Tue, Apr 2 20243:51 PM EDT

Recent Wall Street upgrades of Estee Lauder don't change our lingering concerns over the company's underperforming stock and its business in China. Citi on Tuesday took its rating on shares of the luxury cosmetics giant to a buy from neutral. The analysts also raised their price target to $175 per share from $160 — representing about 15% upside. The research firm believes the company's top line is approaching an inflection point as channeled inventories in Asian travel retail normalize. The analysts were also encouraged by CEO Fabrizio Freda's optimism on business growth in China, a key growth market for the company. This is the second upgrade within the past week. Bank of America last Thursday upgraded Estee Lauder to a buy while increasing its price target to $170 from $160. The analysts believe earnings have bottomed, saying the company is on a path to reaccelerate sales and profit growth during the second half of fiscal 2024 as it adapts to slower travel retail, increases in efficiency, and initiates new product lines. Last quarter, Freda said the company was at an "inflection point" in its return to growth and inventory was getting to the right levels. The company also identified $1.1 billion to $1.4 billion of net productivity savings to support profits over the next couple of years. Estee Lauder is expected to report its fiscal 2024 third-quarter results on May 1. Since all-time highs above $372 in early 2022, shares of Estee Lauder have been crushed. The stock has dropped nearly 40% in the past 12 months, though it has gained 4% year to date. Sure, the post-Covid recovery in China has been rough. But management added insult to injury by not realizing it quickly enough to stop the bleeding. EL 5Y mountain Estee Lauder 5 years Jim Cramer said Tuesday Estee Lauder "was a bad pick" for the portfolio. We started buying the high-end cosmetics company ahead of China's economic reopening after Covid. We were expecting the company to break out from pent-up consumer demand. That story did not play out as Asian Travel Retail channels in key destinations like Hainan, known as the Hawaii of China, and elsewhere on the mainland were slow to recover. We were disappointed management was not able to get a handle on its bloated inventories sooner. To be sure, they've been focused on rightsizing their inventory position which should eventually lead to an inflection point in sales and earnings. Management's steps toward inventory normalization and its profit recovery plan to strengthen margins in 2025 and 2026 are helping create what looks like an earnings bottom. The CEO said it would happen. Citi and BofA seem convinced. Jim said he has had multiple meetings with Freda who thought duty-free stores in China and South Korea, which the company relies on heavily would hold up. They didn't. "The pressure is on him to deliver," Jim said. But he added the Club will "stay long" for the time being because we don't want to sell the stock at such low levels when a turnaround maybe in the making. (Jim Cramer's Charitable Trust is long EL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

An Estee Lauder pop-up store is seen inside daimaru Department Store on Nanjing Road Pedestrian street in Shanghai, China, August 6, 2021.

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