Estee Lauder (EL) is among the global beauty brands whose shares have been driven down by coronavirus fears, sliding 10% since their record high on Jan. 17. But one money manager says it remains a good long-term investment for one core reason: pricing power.
Estee Lauder has a large stable of brands in addition to its namesake, including department-store mainstay Clinique, Bobbi Brown, MAC and the ultra high-end La Mer. Elliot Savage, a portfolio manager at YCG Investments, says it’s that network of aspirational brands that not only allows Estee Lauder to keep raising prices – it forces it to do so to maintain its perceived status to consumers.
“People are buying it for social signaling,” Savage told Yahoo Finance’s “On the Move.” “And so as wealth rises over time, you actually have to increase prices, or else the value proposition degrades.”
The stock, however, has been hit by concerns that China sales would stumble because of coronavirus. Estee Lauder gets 17% of its sales from China, according to Piper Sandler’s Erinn Murphy. On Jan. 24, she wrote in a note that the company was the global consumer brand most at risk from a potential travel retail slowdown.
Analysts at Oppenheimer downgraded the stock to perform from outperform last Thursday, citing coronavirus risk as well as the valuation. The shares are trading at 39 times trailing earnings.
Savage says Estee Lauder’s pricing power should be little affected by the virus. “Their volumes may suffer in the near term, but for luxury goods, the most important thing that you want to do is you want to maintain the scarcity of product and you want to have the brands be difficult to get,” he said. In some cases, he said, some companies, like Louis Vuitton, destroy goods that don’t sell in order to maintain that scarcity value.
Estee Lauder is set to report earnings on Thursday morning. Analysts surveyed by Bloomberg on average estimate earnings per share of $1.90 last quarter on revenue of $4.35 billion, each a 9% increase.
Julie Hyman is the co-anchor of On the Move on Yahoo Finance.