It's not often that investors have the chance to buy stock of timeless brands at a huge discount, but Estee Lauder (EL -0.51%) may present such an opportunity.
Even though Estee Lauder owns its namesake brand and many other household names such as Clinique, MAC, Tom Ford, and others, the stock has cratered 81% off its all-time highs, and it now trades at levels not seen since 2013.
But at least one insider sees an opportunity -- and maybe a big one. The question is, should one follow this deep-pocketed investor into the stock?
A director pushes in his chips
On November 13 and 14, Estee Lauder director Paul J. Fribourg purchased $24.9 billion of stock at an average price of $64.27 per share. Fribourg actually bought the shares through his company Continental Grain, a holding company that invests in agriculture companies, which he controls and runs as CEO.
What's especially notable about the big buy, though, is that this marks Fribourg's first open-market purchase of Estee Lauder shares since he joined the board in 2006. The size and rarity of the buy suggests Fribourg may see a unique opportunity.
Can Estee Lauder overcome its problems?
There are, as one might expect, very serious reasons for Estee Lauder's decline. First, its best growth market pre-pandemic was China, augmented by makeup purchases by traveling Chinese citizens overseas. However, that stream of revenue, which made up roughly 30% of EL's sales at China's peak, has declined severely as China has encountered severe economic problems since the pandemic. While management initially forecast some improvement in the region this year, declines are actually accelerating, with EL's China sales down double-digits in the recent quarter.
Estee Lauder's other major geographies weren't exactly great either, with North America sales down 1% in constant currency, and Europe, Middle East, and Africa down 4%. That being said, Europe was up single digits when factoring out "travel retail" sales from Chinese travelers.
Adding to economic pressures, there has been turmoil inside Estee Lauder, too. In September, Jane Lauder, the youngest grandchild of founder Estee Lauder, wrote a letter to the board suggesting it oust her cousin William, who has been Chairman since 2009. Jane has been an executive at the company but was recently passed over for the CEO job, with current CEO Fabrizio Freda stepping down. The board decided to promote Stephane de la Faverie, an insider, who came up under Freda.
Given that Jane believed the current leadership is responsible for the poor performance over the past few years, this internal struggle shows an even greater uncertainty regarding management's strategy.
Can Estee Lauder rejuvenate its stock? Image source: Getty Images.
The turnaround case
So, what might Fribourg see that could lead to a turnaround? The most obvious thing would be a better macroeconomic environment, particularly in China. That could potentially happen as China recently implemented new stimulus measures in an attempt to boost consumer confidence and demand.
Estee Lauder management also announced a "Profit Recovery and Growth Plan," or PRGP, last year. Through 2026, the plan aims to cut $800 million to $1 billion in annual costs. In 2024, management added an additional restructuring plan, which aims to increase those savings by $350 million to $500 million, adding up to a total of $1.15 billion to $1.5 billion in potential cost savings.
That right-sizing of the business is long overdue. Even though Estee Lauder has seen revenue decline in recent years, trailing 12-month revenue is now back to 2019 levels. Back then, operating profit was roughly $2.5 billion. Yet at roughly the same level of revenue today, operating profit has fallen to a mere $921 million.
EL Revenue (TTM) data by YCharts
So in theory, if things stabilize here and Estee Lauder implements its cost-cutting measures, it could theoretically get operating profit back near 2019 levels.
At today's market cap of just $25.1 billion and an enterprise value of $30.6 billion, that would about to just 10 and 12 times times operating profit, respectively. That would be a pretty cheap valuation relative to Estee Lauder's history. Between 2016 and the end of 2019, Estee Lauder traded between 18 and 30 times EV to operating profit.
EL EV to EBIT data by YCharts
Why caution is still warranted
While following the massive insider buy is tempting to follow, Estee Lauder still seems like a risky bet today. After all, the world has changed a lot since pre-pandemic, especially China. Once seen as a perpetual engine of global growth, trade wars and a huge property sector bust have made for recessionary and deflationary conditions. Moreover, foreign investors have other concerns on China, such as geopolitics and the ability to take money out of the country.
While the government recently announced stimulus plans with interest rate cuts and lower capital requirements for banks, some still believe China hasn't gone far enough to get money directly into the hands of consumers. So, any Chinese turnaround remains uncertain, and could take a lot of time, if it happens at all.
Furthermore, management's melodrama may continue. Both Jane Lauder and her cousin William are still on the board. And with a new CEO taking the reins, there's even more uncertainty as to the company's execution going forward.
Finally, while the company's debt doesn't seem like a huge problem, Estee Lauder's net debt load has increased from under $2 billion at the onset of the pandemic to $5.5 billion today. In a world of generally higher interest rates, that's also going to pressure earnings.
EL Net Total Long Term Debt (Quarterly) data by YCharts
Lastly, it's unclear if the company's current cost-cutting plan may be affecting revenue and profit growth. After all, the most recent quarter was even worse than the prior three, meaning the current revenue trend is actually below 2019 levels.
So, with a lot of still-present uncertainty around China, senior management, and a higher debt load, investors should remain cautious on Estee Lauder, even in light of the big insider buy.
That being said, if a broader global consumer recovery definitively emerges, especially in China, Estee Lauder could make a great turnaround pick. So, the stock is going on the watchlist today, in case that rosier scenario shows signs of panning out.
