If a stock falls to a 10-year low, there’s no doubt that buying it requires taking on serious risk. For this type of sale to occur, investors are looking for exits and likely have some serious reservations about the future of the company and perhaps whether it can survive.

Estée Lauder Companies (NYSE:EL) It recently fell to levels it hasn’t reached in more than a decade. As of Monday’s close, the stock is down a whopping 56% this year. Let’s dive into the issues plaguing Estée Lauder and see if the badly slumping stock is headed for an even bigger decline or could be a good contrarian buy right now.

Estée Lauder’s top and bottom lines are heading in the wrong direction

Estée Lauder’s business hasn’t been strong in recent years. Revenues are falling and profits are falling even faster. With a blow or two like this, it’s no wonder the stock is in such disastrous shape.

EL Net Income (Quarterly) data YCharts.

Estée Lauder cited the weak market, particularly in China, where consumer sentiment has deteriorated, in the company’s most recent earnings report published last month. The company wasn’t even optimistic that the country’s stimulus measures could turn things around anytime soon.

To cap things off, the company also announced it would cut its quarterly dividend to $0.35, a 47% drop. For investors willing to be patient in the hope of a turnaround for the cosmetics company, this undoubtedly gave them less reason to hold on and led to a further decline in share prices.

Is Estée Lauder a cheap stock to own?

Estée Lauder has been struggling with profitability in recent quarters, causing the stock’s price-to-earnings (P/E) ratio to skyrocket above 100. But even according to analyst forecasts, it’s trading at around 37 times next year’s earnings. This is a high multiple for a non-growth business. The stock is trading at 1.5 times the price the end comesIt may seem modest, but if profitability continues to decline, that may not be comforting to investors either.

The company not only needs to find a way to grow its business, but to do so while increasing its profitability. In the quarter ended Sept. 30, Estée Lauder’s selling, general and administrative expenses accounted for 94% of its gross profit. Although the company has achieved strong success gross profit if its margins are above 70%, it needs to reduce its overhead to stay out of the red.

Given its weak revenue results and high costs, it’s hard to justify paying Estée Lauder more than 30 times next year’s earnings; This isn’t a bargain buy unless you’re expecting a big return on business.

Should you give Estée Lauder shares a chance?

Estée Lauder is in the midst of a restructuring effort and has a new CEO in Stéphane de La Faverie, who recently took over. And all of this is happening amid a lot of economic uncertainty as consumers look for ways to cut costs amid inflation. It’s certainly not the easiest environment for Estée Lauder to right its ship and turn things around.

That’s why this stock will only be suitable for investors with a high risk tolerance. There are a lot of things that management needs to fix before this company can become a good investable company again.

Investors who are at least interested in buying the stock may want to take a wait-and-see approach to evaluate the new CEO’s strategy and determine whether the business looks to be in better shape in the coming quarters. If not, there may still be enough room. consumer goods stock its value will decrease further.

Should you invest $1,000 in Estée Lauder Companies right now?

Before buying shares in Estée Lauder Companies, consider:

Motley Fool Stock Advisor The analyst team just determined what they believe to be Top 10 stocks for investors to buy now… and Estée Lauder Companies wasn’t one of them. The 10 stocks that made the cut could deliver monster returns in the coming years.

Think about when Nvidia You made this list on April 15, 2005… if you invested $1,000 on the date we recommended, You would have $896,358!*

Stock Advisor provides investors with an easy-to-follow success plan, including guidance on portfolio construction, regular updates from analysts, and two new stock picks each month. Stock Advisor there is service more than four times Return of the S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of November 11, 2024

David Jagielski It has no position in any of the stocks mentioned. The Motley Fool has no position in any stocks mentioned. The Motley Fool has a feature disclosure policy.