Estée Lauder has had an impressive run over the past six months as its shares have beaten the S&P 500 by 6.6%. The stock now trades at $88.32, marking a 22.6% gain. This performance may have investors wondering how to approach the situation.
Is now the time to buy Estée Lauder, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Estée Lauder Not Exciting?
We’re happy investors have made money, but we're swiping left on Estée Lauder for now. Here are three reasons there are better opportunities than EL and a stock we'd rather own.
1. Core Business Falling Behind as Organic Sales Decline
When analyzing revenue growth, we care most about organic revenue growth. This metric captures a business’s performance excluding one-time events such as mergers, acquisitions, and divestitures as well as foreign currency fluctuations.
Estée Lauder’s demand has been falling over the last eight quarters, and on average, its organic sales have declined by 4.8% year on year. 
2. Shrinking Operating Margin
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Analyzing the trend in its profitability, Estée Lauder’s operating margin decreased by 11.7 percentage points over the last year. Estée Lauder’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was negative 5.5%.
3. EPS Trending Down
We track the change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Estée Lauder, its EPS declined by 40.8% annually over the last three years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
Final Judgment
Estée Lauder’s business quality ultimately falls short of our standards. With its shares beating the market recently, the stock trades at 40.2× forward P/E (or $88.32 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. Let us point you toward one of our top digital advertising picks.
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