Estee Lauder Stock Could Turn Ugly

In the last three months, shares of Estee Lauder (EL) are down 15%. On Wednesday, the company posted mixed first-quarter fiscal 2017 results.

Estee Lauder is down about 6.5% year to date. The company posted a mixed first quarter, like the fourth quarter before it. Estee Lauder reported first-quarter earnings of 84 cents per share, 4 cents better than the consensus estimate. Revenue rose 1.1% to $2.87 billion.

Management cut guidance. The company said second-quarter earnings would be in the range of $1.10 to $1.15 per share, vs. the previous estimate of $1.31. Approximately 2%, or 5 cents, of the cut is due to the negative effects of foreign currency. Sales have slowed as well. The company said revenue is set to increase between 3% and 4%, vs. prior forecasts of 6.4% growth.

Gross margin was 79.3%, down 30 basis points. Operating margins were flat at 15.7%.

The company raised the dividend 13% to 34 cents per share.

For the year-end, management cut the top end of its prior guidance. Management predicts earnings between $3.38 and $3.44 per share, vs. the previous estimate of $3.47. Sales are expected to increase between 6% and 7%. On a constant currency basis, fully diluted earnings per share are expected to be up between 8% and 10%.

While the company trimmed guidance, management seems confident business could accelerate because of a flow of new products, especially from the small- and medium-sized brands. The company foresees approximately one-third of its product portfolio growing by the low single digits. The rest of the portfolio is growing in the high single digits to double digits.

Management was confident it could cut expenses to improve the company's fixed operating leverage. In fiscal 2014, Estee Lauder reported operating margins of 17% and revenue growth of 7.7%. The company is expected to end this year with a margin of 15.5%, making it more difficult to grow earnings per share.

I think it would be wise to stay on the sidelines here. With the stock trading between 23 and 24 times fiscal 2017 estimates of $3.43, its hard to expect Estee Lauder to earn a higher multiple without getting back some operating leverage or better top-line growth. If management can't find any leverage, this stock could turn ugly.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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