Why Estee Lauder Rallied This Week

Shares of beauty giant The Estee Lauder Companies (NYSE: EL) rallied 11.8% this week through Thursday, according to data from S&P Global Market Intelligence.

Estee Lauder reported fiscal fourth quarter earnings this week that blew past analyst estimates. Furthermore, the company gave optimistic guidance for the fiscal year ahead.

Estee Lauder's stock has been punished thoroughly in recent years, down about 70% over the past five years, even after this week's move. However, the long grind of Estee Lauder's turnaround plan appears to be gaining traction.

Estee's beautiful quarter

In the fourth quarter, revenue increased 6.5% to $3.63 billion, with adjusted (non-GAAP) earnings per share up 333% off a low base to $0.39. Both figures handily beat analyst expectations. Furthermore, both top-line growth and profit margins accelerated relative to recent quarters.

Estee Lauder appears to be executing well on its "Profit, Recovery, and Growth Plan" (PRGP), under which the company is cutting costs aggressively to fund customer-facing investments. Management noted that the company had achieved $1.2 billion in cost cuts to date, which was at the high end of the previous guidance range. That enabled a 1.5-percentage-point improvement in gross margins, despite inflation and tariffs. With the savings, management noted it had increased "customer-facing investments" by 7% in the prior 12 months.

For the year ahead, management expects growth and margin expansion to continue. While the company guided only to an organic revenue growth range of 3% to 5%, management also forecast adjusted operating margins for the upcoming year to land between 12.7% and 13.5%, up from the prior forecast, leading to adjusted EPS between $3.10 and $3.55, which would amount to between 24% and 34% EPS growth.

Image source: Getty Images.

A good start, but the next year is priced in

No doubt, this week's earnings report was a good sign for Estee Lauder shareholders. However, as stated above, the stock is still down 70% over the past five years, and it will take considerably more growth for the company to regain those levels. Even with the better-than-expected guidance, Estee Lauder's stock still trades at nearly 30 times the midpoint of forward guidance.

Therefore, it seems like the market is already anticipating even greater earnings growth for the luxury stock beyond the upcoming year. Given that Estee Lauder's top-line growth is still only in the mid-single digits, the stock seems more like a "hold" than a "buy" at this level.

Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.