The outlook for performance recovery is uncertain. Morgan Stanley issued a bearish research report on the beauty giant Estee Lauder Companies Inc. Class A (EL.US).

One of the world's largest skincare, beauty, and fragrance companies, Estee Lauder Companies Inc. Class A (EL.US), experienced a decline in performance in the 2025 fiscal year, with net sales for the full year decreasing by approximately 8% year-on-year. The fourth quarter sales were approximately $3.41 billion, down 12% year-on-year, but still better than the general market expectations. However, the beauty and skincare giants profit guidance for the 2026 fiscal year is far below expectations, and the company expects that an increase in U.S. tariff rates will lead to a decrease in profits of approximately $100 million. Following the weak performance data and performance guidance, Wall Street financial giant Morgan Stanley released a research report, reiterating a "neutral" cautious bearish rating for Estee Lauder Companies Inc. Class A stock, and predicting that the company's stock price will continue to decline, giving a target price of only $66, which means that Estee Lauder Companies Inc. Class A stock price has a potential downside of over 20% in the next 12 months. With more detailed financial reports and performance guidance, almost all major product categories of Estee Lauder Companies Inc. Class A experienced significant declines, especially in the region, most notably affected by the sluggishness of the Asian tourism retail business. As a result, Estee Lauder Companies Inc. Class A's quarterly sales volume remained weak, failing to achieve the additional surprises that the market had hoped for from a strong recovery in markets such as China and other Asian markets. Despite the pressure on sales, Estee Lauder Companies Inc. Class A's Q4 profit performance exceeded expectations: the gross profit margin remained flat with a slight increase year-on-year (adjusted gross profit margin was 71.9%, up 10 basis points year-on-year), mainly due to price increases, product mix optimization, and cost savings offsetting the adverse effects of declining sales. Sales and administrative expenses were slightly higher than expected (accounting for approximately 0.6 percentage points of net sales), but due to the better-than-expected gross profit margin, the company achieved an operating profit of $137 million, higher than the market's general expectation of $116 million. The company's adjusted earnings per share were $0.09, slightly exceeding analysts' expectations (approximately $0.07-$0.08). However, this profit level was significantly lower than in the same period last year (earnings per share of $0.64). The Morgan Stanley analytics team pointed out in their review of the financial report that the weak net sales data suggest that the slight outperformance in EPS is more driven by cost and gross profit margin improvement, but the quality of growth is relatively lacking. As the market had expectations for a significant improvement in the company's performance based on signs of improvement in Asian business, the lack of any surprises in sales and performance guidance disappointed investors. On the day the financial report was released, Estee Lauder Companies Inc. Class A's stock price fell by approximately 4% to reflect the above factors. The company's management gave a cautious outlook for the 2026 fiscal year: it is expected that the year-on-year change in net sales from internal sources will range from 0% to +3%, reporting a net sales growth of +2% to +5%. This growth rate guidance is roughly in line with market consensus expectations (approximately +2%-3%). Estee Lauder Companies Inc. Class A expects the global high-end beauty market to grow by approximately 2%-3% in the 2026 fiscal year, providing a moderate industry background for the company. Under this assumption, the company's adjusted earnings per share (EPS) guidance for the 2026 fiscal year ranges between $1.90 and $2.10, meaning a potential year-on-year growth of 26%-39%. However, this EPS guidance is lower than the previous Wall Street consensus range of approximately $2.10 to $2.20 (a year-on-year increase of around 46%). The Morgan Stanley analyst team stated in the research report that the performance outlook for Estee Lauder Companies Inc. Class A for the new fiscal year is generally conservative, especially as the profit guidance is lower than expected. Morgan Stanley stated that the main reason for the EPS guidance being lower than market expectations is due to the assumption of a higher tax rate: the company expects an effective tax rate of approximately 36% for the 2026 fiscal year, significantly higher than the initially expected level of around 32%, which could result in the EPS guidance being about $0.14 lower than expected. Morgan Stanley stated that excluding the impact of the tax rate, the company's core profit guidance is more in line with Wall Street's expectations. The analyst team from Morgan Stanley also pointed out that the first full-year guidance after the new CEO took office tends to be cautiously optimistic, which may partially explain the slightly lower-than-expected guidance. In addition, the company's outlook for the first quarter of the 2026 fiscal year is also cautious: it is expected that sales from internal sources will decrease by low single digits to flat year-on-year in the first quarter. This guidance essentially covers the market's consistent expectation range (from -1% to 0%), indicating that the management's judgment on the pace of recovery is in line with market expectations. It is worth noting that the company expects the tourism retail business channel in the early stages of the 2026 fiscal year to achieve high single-digit growth, and the Chinese market is expected to return to robust growth, but the decline in other regions is expected to ease. Morgan Stanley maintains a "neutral" (Equal-weight) rating for Estee Lauder Companies Inc. Class A, reflecting a cautious bearish stance. The target price of $66 given by the firm is significantly lower than the current stock price. This target price is based on a forecasted earnings per share (EPS) of $2.93 for the 2027 fiscal year applied to an expected price-to-earnings ratio of approximately 22.5x. In comparison, Estee Lauder Companies Inc. Class A had an average forward price-to-earnings ratio of about 26 times in the 10 years prior to the COVID-19 pandemic. Morgan Stanley uses a lower valuation multiple primarily because the company's earnings base and net sales are still under pressure, and there is uncertainty regarding the effectiveness and execution of the "Beauty Reimagined" transformation plan, as well as the heavy pressure of Trump's tariffs , all of which weaken the visibility of whether the performance can recover smoothly. In other words, Morgan Stanley believes that until the company's performance fully emerges from the trough or shows significant signs of recovery, it is not advisable to give high valuation multiples based on historical average levels. Morgan Stanley continues to take a cautious stance on the performance outlook for Estee Lauder Companies Inc. Class A, and stated that if the demand for high-end beauty products in China and North America continues to be weak, or if the global tourism retail business recovers less than expected or deteriorates further, it will continue to drag down the company's sales. Additionally, if the company loses market share in key categories/markets, or faces challenges in implementing the "Beauty Reimagined" transformation plan, it will have a negative impact on profits. Furthermore, intense price competition from competitors in Europe and China could also potentially lower profit margins. These adverse factors combined could result in company performance and stock price performance falling even below Morgan Stanley's current expectations.