Share Weakness Presents Buying Opportunity for Wide-Moat Estee Lauder as Long-Term Trends Intact

We think the decline in Estee Lauder shares presents a compelling buying opportunity for long-term investors, as the market seems overly focused on near-term headwinds while long-term growth prospects remain robust. The shares are down about 50% year to date, including the mid-single-digit percentage drop on lowered full-year guidance disclosed in conjunction with the fiscal 2023 first-quarter report. The lowered guidance (sales down 6%-8% from 3%-5% growth previously and adjusted EPS to $5.25-$5.40 from $7.39-$7.54) is driven by three factors: weak travel retail in Hainan because of COVID-19-related restrictions, cautious holiday ordering by U.S. department stores given economic concerns, and currency headwinds. While these challenges affect our near-term outlook and we will adjust our fiscal 2023 estimates accordingly, they do not alter our long-term expectations for Estee, which include 7% annual sales growth and low 20s operating margins. We plan to trim our $278 fair value estimate by a mid-single-digit percentage, leaving the stock trading at a 30% discount to our valuation.