Today's most attractive beauty stock has double-digit potential

Key Points

• Estee Lauder is in a downtrend and unlikely to hit bottom due to mounting headwinds in international business. 
• e.l.lf is taking share, growing and raising guidance. 
• Ulta Beauty is beaten down by fear of slowing growth, but the phoenix is ready to rise, given solid results for Q3. 

Estee Lauder Companies Inc. NYSE: EL is on track to regain traction. Despite solid trends in the beauty category, it faces substantial headwinds with the near-term outlook declining. The takeaway is that Estee Lauder stock will be a buy for 2025, but not until later in 2024. Between then and now, companies like e.l.f. Beauty Inc. NYSE: ELF and ULTA Beauty Inc. NYSE: ULTA are gaining traction and taking market share, offering substantial upside potential for investors. 

Estee Lauder sinks on solid results 

Estee Lauder and e.l.f. Beauty have moved lower following their CQ3 releases. The difference in the action is that Estee Lauder extends a downtrend and looks ready to set more new lows while e.l.f.’s market is conforming support following a correction. Estee Lauder’s results were undercut by reduced guidance while an increase bolstered e.l.f. 

Estee Lauder's results were better than expected, but headwinds related to its size and scope impacted the outlook. Results were solid across most segments and regions, but weaknesses in key areas like skin care, hair care, emerging markets and Asia were enough to offset the strengths.

Regarding guidance, headwinds in beauty stocks in overseas markets should persist and possibly worsen. 

This led management to lower its guidance for the Q3 and financial year 2024 periods, and the cut was substantial. Earnings for the year should be below $2.50 compared to the $3.65 pre-release consensus, which may be optimistic. The war in Israel is disrupting international travel, which is a driver of business, and it should be a long, complex, painful event. 

The worst news for EL investors is the risk to the dividend. The new guidance puts the payout ratio near 100%, which is difficult to sustain. The company remains well-capitalized, but there is concern the distributions could be cut or suspended if the business recovery fails to take hold. It’s already suspended annual increases, which was no small event for share prices. 

e.l.f. Beauty takes a share in a key category 

e.l.f. Beauty is a much different position than Estee Lauder, with about 1/10th of the business. The difference is that e.l.f. products are resonating with consumers and leading the company to gain market share. It's bad news for Estee Lauder but great news for e.l.f. Investors who can look forward to another year of solid growth. 

The company’s Q2 results included:

• Top and bottom line strength
• A 570 basis point improvement in gross margin
• An increase in guidance

The company raised its target for revenue to a minimum of $896 million compared to the previous high end of $802, and there is a chance guidance will be increased again with the Q3 results.

Analysts see an upside for both stocks, but the sentiment will weigh heavily on EL shares this year. EL analysts are lowering their targets rapidly and may continue that trend until there is a positive signal in the results. e.l.f. investors, on the other hand, have the support of analysts. Its consensus estimate is up more than 200% year-over-year (YOY), offers a 40% upside and will increase following the Q2 release. Assuming this trend continues, ELF stock should continue bottoming and begin to rebound soon. 

Ulta Beauty: Ready to rocket higher 

Ulta Beauty stock has been under pressure due to fears of slowing growth. Analysts expect Ulta’s revenue to decline sequentially and for YOY growth to slow, contrary to e.l.f. results and segment results from Estee Lauder. 

Ulta will probably exceed the analysts' consensus estimates; the question is how much and how it will impact the guidance. The company should sustain growth in 2024 but at a mid-single-digit pace compared to the last few years of double-digit growth. Solid guidance could be the catalyst to reinvigorate the market. The analysts' data suggests this stock is trading near its floor with a 40% upside potential.