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Investing.com -- Morgan Stanley raised its rating on elf Beauty to Overweight from Equal-weight, saying investor concerns about slowing U.S. sales, price increases and the recent Rhode acquisition have left the stock undervalued.
The brokerage said recent share price swings, which includes a 10% drop after first-quarter results reflect heightened worries over demand from lower-income consumers, limited guidance, and broader weakness in high-growth consumer names.
The stock has fallen about 50% from its peak last year.
Morgan Stanley (NYSE:MS) argued that fears over demand loss from higher prices are overstated and that analysts are underestimating the profit boost from price increases and the acquisition of Rhode, a fast-growing cosmetics brand with no physical retail presence.
Rhode generated $225 million in sales in three years with only ten products, and the bank sees significant expansion potential through planned distribution deals.
The firm also said consensus forecasts imply e.l.f.’s core business earnings will drop 22% between fiscal 2025 and 2027, an assumption it called unreasonable given continued international growth and market share gains in the United States, even as growth has moderated.
Morgan Stanley’s 2027 adjusted EBITDA estimate is 18% above Wall Street’s consensus, reflecting its expectations for stronger-than-expected contribution from Rhode, the impact of price increases, and steadier base business performance.
"We are upgrading ELF to OW, as consensus looks materially too low (we are 18% above consensus FY27 Adj. EBITDA) considering potential profit contribution far above street/ consensus expectations from ELF pricing, upside from rhode accretion, and solid base business growth even noting volatility," analysts at Morgan Stanley said.