David Hay — Friday POW!: Estée Lauder (EL) — turnaround morphing into growth

One-line take: This week's POW! is Estée Lauder (EL), the 80-year prestige-beauty brand. The thesis: the new CEO's "Beauty Reimagined" / Profit Recovery and Growth Plan (PRGP) is working — margins are expanding (adjusted operating margin 15.0% vs 11.4%, +360bps; gross margin 76.4%), FCF rebounded to $891M from $276M, and China has flipped from headwind to tailwind (Mainland sales +11%). EL trades near its most compressed 10-year P/S and P/E; because collapsed margins inflate the P/E, Haymaker argues P/S is the right turnaround lens — a return to just 3× sales implies ~60% upside, and analysts' $90–100 targets ~15–30%. Timed caveat: after EL popped ~12% on the killed Puig merger, "wait for the stock to ease back" before buying. A 2–3-year hold for a potential double — "an investment, not a trade."

1. Stocks & names mentioned

Ticker	Name	Research	View	What he said	At
EL	Estée Lauder	QT · SA · STK · FA	Positive	Pick of the Week — "another turnaround morphing into a growth story." New CEO Stéphane de La Faverie's PRGP ("Beauty Reimagined") is working: adj. operating margin 15.0% vs 11.4% (+360bps), gross margin 76.4%, FCF $891M (vs $276M), China flipping from ~30%-of-sales headwind to tailwind (Mainland +11%). EL trades at decade-low P/S & P/E; with margins collapsed, P/S is the better turnaround metric — a return to 3× sales ≈ 60% upside (analyst PTs $90–100, ~15–30%). After EL popped ~12% on the killed Puig merger, wait for a pullback. A 2–3-year hold for a possible double; "an investment, not a trade."	read

References only (not tickers): the Tom Ford brand acquisition ($2.8B, 2022 — a ~$1B write-down), Spain's Puig (the killed merger counterparty), and Jim Cramer / CNBC (the "belated tout" jibe). A PALL footnote appears under the image-only Buys list ("cost basis adjusted to reflect 5:1 split") but the lists are not text-readable, so portfolio.json is unchanged.

2. Talking points

This week's pick — Estée Lauder, with a timing caveat

"Another turnaround morphing into a growth story" in the 80-year legacy brand. But after the write-up was finished, EL popped ~12% after-hours on news it would not merge with Spain's Puig — so "wait for the stock to ease back a bit before taking a position."

The downfall — China, destocking, and the Tom Ford write-down

China was once ~30% of sales; post-Covid demand fell sharply, causing inventory overstock and downward margin pressure — "an adverse domino effect."
The 2022 Tom Ford acquisition ($2.8B) led to a ~$1B write-down, further hitting margins and free cash flow. "Analyzing those critical metrics seems to be a lost art in today's investing environment."

The new CEO and the PRGP plan

New CEO Stéphane de La Faverie arrived in early 2025 and launched "Beauty Reimagined" / the Profit Recovery and Growth Plan (PRGP): cost cuts, innovation focus, channel optimization — now showing margin expansion and stabilized trends nearly a year in.

Turnaround momentum in the numbers

FY2026 Q2: +6% reported / +4% organic sales, adjusted EPS +43% YoY, fragrance double-digit growth.
Raised FY2026 guidance: organic growth at the high end (3–5%), adjusted operating margin expanding ~300bps to 12.5–13%. FY2025 marked the earnings trough; bull case sees 35%+ EPS CAGR through 2028.

Structural tailwinds in prestige beauty

High-margin fragrance growing double digits; travel retail stabilizing while DTC/e-commerce/domestic expand; the broader prestige category grows mid-to-high single digits on Asian middle-class growth and trading-up behavior.

Margins and free cash flow are back — "the heart of a business"

Operating cash flow $1.2B (+79% from $671M); FCF $891M (up sharply from $276M); gross margin 76.4% (from 75%); adjusted operating margin 15.0% (from 11.4%, +360bps) — driven by PRGP savings, sales leverage and easy comps, partly offset by tariffs/inflation.

Valuation — use P/S, not P/E, for a turnaround

25× EPS "isn't remotely cheap" superficially — but that's because collapsed margins inflate the P/E. P/S is "essentially rock bottom" and the more important turnaround metric: a re-rating to just 3× sales would be ~60% upside.
On normalized earnings, 25–35× forward P/E on FY2026 EPS guidance of $2.35–2.45 supports analyst 12-month targets of $90–100 (15–30% upside from ~$78) — "less upside than the P/S ratio implies but still likely better than the overall market."

China — from headwind to tailwind

Mainland China is now a key growth driver: net sales $774M (+11% reported, +6% organic); high-single-digit organic growth for nine months, gaining share for 4–5 straight quarters. Management sees China supporting mid-single-digit growth into FY2027.

Technicals and the bottom line

Turnarounds are rarely breakout charts, but EL has broken the "vicious downtrend" in place since 2022.
"Know what you own and why you own it." A legacy brand whose management "knows what they're doing"; own it for asymmetry — "maybe a double, possibly more" — but expect bumps and a 2–3-year timeframe. An investment, not a trade.

3. In plain English

EL — Estée Lauder Positive

Estée Lauder is an 80-year-old maker of prestige cosmetics, fragrances and skincare (it owns dozens of beauty brands). The stock cratered after 2022 for two reasons: China — once nearly a third of its sales — fell off a cliff after Covid, leaving the company with too much unsold inventory; and a pricey 2022 brand purchase (Tom Ford) had to be written down by about $1 billion. Both crushed profit margins. A new CEO arrived in 2025 and put a recovery plan (the "Profit Recovery and Growth Plan," or PRGP) in place: cut costs, focus on innovation, fix the sales channels. It's working — profit margins are climbing back, and the cash the business generates after spending (free cash flow) jumped from $276M to $891M in the latest quarter. China has swung from being the big problem to being a growth engine again.

The clever part of the argument is how to value a turnaround. On a price-to-earnings (P/E) basis EL looks expensive at ~25× — but that's misleading, because earnings are temporarily depressed by collapsed margins, which mechanically inflates the P/E. Haymaker says the right yardstick for a recovering company is price-to-sales (P/S), which strips out the margin distortion and is near a 10-year low. If EL's P/S simply returns to 3× sales (a level it has hit before), that's roughly 60% upside; even cautious analyst targets imply 15–30%. The catch: shares had just jumped ~12% on news a merger with Spain's Puig was called off, so Haymaker says wait for a dip before buying. This is a 2–3-year hold for a potential double — "an investment, not a trade."

Summary derived from the paid Haymaker newsletter (text in transcript.txt) for personal study. Not investment advice. © Haymaker / David Hay for source material.