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Investing.com -- HSBC Global Research has upgraded Estée Lauder Companies (NYSE:EL) to “buy” from “hold” and raised its target price to $99 from $80, citing improved earnings visibility, operational restructuring and reduced risk. The upgrade implies a 27.6% upside from the share price of $77.56 as of June 25.
The reassessment comes after more than three years of share price weakness and repeated earnings downgrades.
Analysts at HSBC now believe the group is nearing the end of its downgrade cycle. The outlook is supported by a weaker U.S. dollar, internal restructuring and signs of stabilization in key markets, particularly China and the U.S.
The company’s profit recovery and growth plan (PRGP) is viewed as substantial enough to place a floor under margins.
Adjusted EBIT margins are projected to improve from 8.5% in fiscal 2025 to 11% by fiscal 2027.
Earnings per share are forecast to nearly double from $1.48 to $2.98 over the same period.
The earnings rebound is expected to be driven largely by cost reductions and organizational efficiencies rather than strong top-line growth.
HSBC cut its sales estimate for fiscal 2025 to $14.4 billion from $14.8 billion, representing an 8% decline year over year.
However, gross margin is projected to rise to 74%, up from a prior estimate of 73.2%. For fiscal 2026 and 2027, HSBC expects 4% and 7% sales growth, respectively, with gross margins reaching 76.0% by the end of the forecast period.
The target price increase is underpinned by a lower weighted average cost of capital (WACC), which was revised down to 7.95% from 8.68%, reflecting greater confidence in management stability and the restructuring roadmap. HSBC’s valuation also factors in a discounted cash flow roll-over.
While valuation remains elevated at 26 times projected 2027 earnings, analysts argue that margins in that year will still be below historical levels, suggesting further upside potential.
Estée Lauder’s return on equity is expected to climb from 10.4% in fiscal 2025 to 21.5% by fiscal 2027.
HSBC notes ongoing risks, including renewed weakness in Chinese demand, inflationary pressures in the U.S., currency fluctuations, and potential brand damage from prior overreliance on daigou and unstructured retail channels.
The report also points to recent market share gains in the U.S., Japan and China, and improvements in Estée Lauder’s channel mix, particularly the decline in dependence on travel retail, which fell 28% last quarter and now represents a low-teens share of total sales.