Estee Lauder is a Beauty!

We’ve followed Estee Lauder for several years, always wanting to own the stock but never able to find a good entry point.

In early November, the company cut its outlook for 2023 due to China’s zero-COVID lockdowns, a stronger U.S. dollar, and tighter inventory management – all temporary macroeconomic problems that will eventually resolve.

The stock contracted almost 8% the next day. Finally, we found our moment to buy shares for our clients.

Estee Lauder is a cosmetics company with skin care, fragrance, makeup, and haircare segments. It targets wealthier women aged 22 to 55 that are less sensitive to prices. For that reason, we feel it can weather through a recession with relative ease. In 2009, its revenues only dropped by about 7% and the dividend was maintained throughout. This was at a time when global banks and auto companies were asking governments for bailout money just to stay alive.

Estee Lauder receives 30% of its revenue from China. Zero-COVID has obviously impacted the company’s sales. However, following protests in defiance of their government, China has accelerated their reopening plans in recent weeks. With stronger growth occurring sooner, the company may increase their guidance in the next several quarters.

Estee Lauder earns a majority of its revenues outside of the United States. A strong U.S. dollar hurts American companies with operations overseas. This is because sales are converted from the local currency to the U.S. currency for accounting purposes at a less attractive exchange rate. At its peak in September, the U.S. dollar had appreciated 20% year-to-date against the global basket of currencies. Since then, those gains have been cut in half as the U.S. Federal Reserve indicated the time has come to moderate future rate hikes to slow inflation.

The stock gets a check next to all the boxes we use for screening. It has a strong Balance Sheet with low debt relative to its cash flow; buys back its own shares; generates positive free cash flow; has a history of increasing its dividend; and trades at its growth rate.

We made a block purchase for suitable clients at about $225.89 U.S. in mid-November. Today, the stock trades at $242.62 U.S., up about 7% in nominal dollars. We’ve continued to add to the stock since our initial purchase.