2023-01-25 20:27:57

Estee Lauder's latest Wall Street endorsement underscores our long-held view on the company

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CNBC
By Paulina Likos

Piper Sandler on Wednesday said it sees considerable upside for Club holding Estee Lauder (EL) as China's long-awaited economic reopening drives pent-up demand for luxury goods a view that's central to our investment case in the beauty brand. The Chinese market is a "vastly underappreciated opportunity" for Estee Lauder, analysts at Piper Sandler wrote in a research note. As daily life in China gradually returns to normal after three years of Covid-19 lockdowns and restrictions, the cosmetics giant stands to gain significantly, the analysts argued. U.S.-based Estee Lauder, which manufactures luxury skin-care products, makeup and fragrances, relies on China for more than a third of total sales. As a result, China's strict zero-Covid policy has weighed heavily on the company's earnings and share price since the start of the pandemic. The stock fell more than 30% in 2022, battered by weak Chinese demand, high inflation and a strong U.S. dollar . But as Chinese citizens start to travel again, long-suppressed demand should drive sales , particularly at duty-free shops in the airports of popular destinations like the island province of Hainan, according to Piper Sandler. "The Chinese consumer has excess savings ready to be spent and we suspect luxury and luxury beauty will be of high priority," the analysts wrote. Looking ahead, Piper Sandler sees massive growth potential for Estee Lauder's stock in 2023. The analysts forecasted a potential 20% upside to the stock that could "easily push shares beyond $300" apiece, boosted just by the Hainan region alone. Piper Sandler Wednesday reiterated the luxury beauty brand as a "top idea" this year, along with a price target of $290 and an outperform, or buy, rating. Similarly, analysts at Oppenheimer earlier this month said given "easing COVID-19 restrictions in China and loosening of travel restrictions, along with a weakening U.S. dollar, we now believe EL is positioned for a powerful sales and [earnings-per-share] recovery." Analysts at Oppenheimer predicted an improvement to Estee Lauder's gross margins to 2022 levels of 19.7% by fiscal year 2024 on the back of China's reopening, up from their fiscal year 2023 estimates of 16.5%. Oppenheimer maintained a $300 per-share price target on Estee Lauder and outperform rating. Shares of Estee Lauder, which have climbed nearly 10% since the start of the year, were trading down around 2% Wednesday afternoon, at roughly $272 a share. The Club take Piper Sander's bullish call on Estee Lauder on expectations for the Chinese market to flourish is in line with our view, and the reason we reinitiated a position in the cosmetics company in September. Jim Cramer on Wednesday said he expects Chinese consumers will likely buy more makeup a high-margin product as they return to the outside world, generating greater profits for the company. Jim has previously called Estee Lauder the "single best play for the opening of China." And the Club continues to anticipate shares of the company will climb higher this year. While the stock should be up on Piper Sandler's bullish analyst call, the retreat today is a potential buying opportunity for investors. " There's nothing negative . I think's it's just selling after a big home run," Jim said. (Jim Cramer's Charitable Trust is long EL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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