Estée Lauder (EL) is a company I first became more familiar with a number of years ago when I noticed the enthusiasm my wife, Erin, had for a new line of makeup. It was a classic Peter Lynch story. She has always loved to try new products and is very, very discerning so when she started using Bobbi Brown and telling me how impressed she was with it, I had to investigate the parent company as a potential investment.
This was about 20 years ago and I ended up buying a small position that did well but, as is my pattern, I sold it too soon. From 2017 to 2021, Estée Lauder’s stock price really hit its stride, with the pandemic lockdown spending spree helping to send the shares up roughly five-fold. However, the post-pandemic hangover and prolonged recession in China has been especially painful for the stock. After peaking over $350 per share almost three years ago, the stock now changes hands in the mid-$60s, roughly the same level it traded at a decade ago when I sold it.
Driving the recent decline was the announcement on Halloween that the company was withdrawing its financial guidance for fiscal 2025 and cutting the dividend in half after sales fell a disappointing 4% in the fiscal first quarter. The company said it expected the sales decline would accelerate to a 6-8% in the current quarter, news that helped the stock price fall by more than 20% on the day of the announcement. Finally, EL reported that CEO Fabrizio Freda would retire and that top executive Stéphane de La Faverie would replace him.
In all, it sounded like a classic “kitchen sink” quarter in which all the bad news and then some is made public all at once in order to provide the new management with a fresh start. Certainly, the current valuation of the stock looks like that bad news has been effectively priced in. Over the past 25 years, the stock has rarely been as cheap as it is today.
Certainly, plenty of short-term challenges remain. The persistent economic weakness in China is a major drag on the company’s performance. Competition from new brands is also a major issue with more celebrity-created lines, which appeal to younger consumers, seemingly coming to market all the time. These issues aren’t going to go away any time soon.
However, what may be under-appreciated by investors today is the fact that Estée Lauder owns a number of top brands with a reputation for high-quality products, inspiring strong customer loyalty and global cachet. This has historically afforded the company gross margins of about 75%, an enviable level of profitability that gives Estée Lauder the luxury of being very careful and methodical in how it goes about righting the ship.
What brings the stock back to my attention today is one insider in particular who appears to be very confident in the direction of that process and what it means for the stock price going forward. Director Paul Fribourg has over the past couple of weeks purchased 387,800 shares of EL in the open market at an average price of just over $64 for a total of roughly $25 million. What’s especially noteworthy about this is that he has a terrific track record in buying stock in companies where he serves on the board.
For example, he bought just over $1 million in shares of Bunge (BG) back in May of 2019 at just over $50; two years later the stock price had more than doubled. In November of 2015, Fribourg bought just over $4 million in shares of Restaurant Brands (QSR) at $35; they nearly doubled in price over the following two years. In September of 2011, he purchased $200,000 in shares of Apollo Global (APO) which immediately bottomed and have risen 40-fold since. Finally, back in 2010 he bought over $200,000 in shares of Loews Corp (L) which soon doubled in value.
Two things can immediately be gleaned by this history. First, while Fribourg’s direct professional experience is in agribusiness, his time served on the boards of Apollo and Loews demonstrate he is intimately familiar with the investing profession and is clearly a price-sensitive buyer. Second, while all of these purchases were successful, they are also far smaller than his recent commitment to EL shares, perhaps suggesting he sees this most recent one as an especially compelling opportunity.
From a technical perspective, the stock recently completed DeMark weekly Sequential and Combo buy signals. Momentum is also extremely stretched but this is a double-edged sword. In my experience, strong downside momentum can indicate that the potential for a bounce is significant yet also that prices are likely to continue in the direction of that momentum. Major bottoms typically occur only after momentum has had time to wane from such extremes.
So while EL shares look compelling from a valuation standpoint and the insider activity is noteworthy, the technicals suggest it may be wise to approach them with caution. This may argue for taking a starter position with the understanding that it may take time, and eventually even lower prices, before a sustainable bottom can be formed. In the meantime, my wife will be happy to know her retirement account is once again aligned with her makeup budget.
