Here's Why Estee Lauder Shares Deserve To Trade At A Premium

KeyBanc Capital Markets raised its price target for Estee Lauder Companies Inc EL following Wednesday's over 9 percent rally in reaction to first-quarter results.

The firm said it sees Estee Lauder as a best-in-class operator worthy of its premium multiple, with potential upside as Asian momentum continues. Estee Lauder's trend in the Americas can stabilize sooner than later, analyst Jason Gere said in a Wednesday note. 

Estee Lauder is poised to maintain its top-line growth and deliver double-digit earnings per share growth on the basis of its "Leading Beauty Forward" savings, a rarity in consumer staples, Gere said. (See Gere's track record here.)

KeyBanc's price target for Estee Lauder shares was raised from $115 to $135 and the firm maintained an Overweight on the cosmetics company. 

Reviewing the Q1 results, Gere said organic growth of 9 percent and earnings per share of $1.21 were notably above the consensus estimates, as well KeyBanc's estimates. Organic sales growth was achieved on the back of strength in China, which helped offset the weakness in Americas resulting from soft department store sales and bad weather, Gere said. 

KeyBanc attributed the earnings beat to a strong top line, along with SG&A timing shifts and cost-cutting that offset the year-over-year contraction in gross margin.

Estee Lauder raised its 2018 organic sales and earnings per share outlook, although the guidance implied deceleration in the second-half, according to KeyBanc. But analyst Gere sees reason for upside.

"Overall, the formula of driving top-line through reinvestment and leveraging fixed costs to create a cycle of sustainable growth is a trade-off investors should welcome," he said. 

Outlining what he likes about the company, Gere said the company's organic sales growth remains best-in-class, helped by key investments in its fastest-growing channels and brands. Cost-saving initiatives will allow Estee Lauder to reinvest behind capabilities, while also driving double-digit earnings growth, he said. 

Downsides include moderating growth in the "Prestige" beauty category, as well as reinvestment that's needed to stabilize the company's Americas business — and difficult comparisons for organic growth over the course of 2018. 

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