Deutsche Bank Likes Estee Lauder After 'Exceptionally Strong' Quarter

Estee Lauder Companies Inc EL reported Wednesday an "exceptionally strong quarter," but the market's reaction to the downside wasn't justified, according to Deutsche Bank.

The Analyst

Deutsche Bank's Steve Powers upgraded Estee Lauder from Hold to Buy with an unchanged $157 price target.

The Thesis

Estee Lauder's third-quarter earnings report is highlighted by a 13 percent organic growth rate and management's guidance for an 11 to 12 percent organic and EPS growth in fiscal 2018, Powers said in the note. But investors appear to have punished the stock for three reasons:

Comps will become increasingly difficult moving forward;
Makeup growth decelerated from a double-digit growth rate to 5 percent; and
A disclosure that some of the company's testings did not meet its standards and could result in modification in marketing claims.

Investors have reason to be "jittery" given Estee Lauder's premium valuation, but the stock's notable underperformance versus the Consumer Staples Select Sect. SPDR (ETF) XLP is a clear overreaction, the analyst said. The company remains one of the "very few" high-growth and margin accretive companies among coverage which implies Wednesday's selloff represents a good entry point.

Estee Lauder deserves to maintain a premium valuation as the company is "relatively well protected" from structural issues seen in the broader industry, the analyst said.