Can Estee Lauder (EL) Surprise This Earnings Season? - Analyst Blog

Estee Lauder Inc. EL is set to report third-quarter fiscal 2014 results on May 2. Last quarter, the company posted a positive surprise of 2.8%. Let's see how things are shaping up for this announcement.

Factors to Consider This Quarter

Estee Lauder has been posting better-than-expected results for past several quarters backed by organic sales growth, product innovation and cost savings measures. However, we believe that the U.K.-based cosmetics product maker may see softer revenues  in the quarter ended Mar 2014 due to unfavorable weather in the U.S. which disrupted consumer shopping trend.

Bad weather in Jan and Feb 2014 due to ice storms in the U.S. resulted in frequent shops shutdowns and prevented consumers from going out to purchase. Travel retail, which comprises a significant portion of Estee Lauder's revenues, also suffered a setback during the quarter. These reasons are going to hamper top-line growth in the third quarter, thus pressuring earnings, in our view.

Moreover, macroeconomic issues like the ongoing slowdown in the Chinese economy and unfavorable currency translation in the emerging markets may hamper the company's international sales.

Estee Lauder expects net sales in the third quarter to increase within 10–11% in constant currency, negatively impacted by foreign currency translation of 1–2%. The company expects earnings per share excluding restructuring charges in the range of 52 to 55 cents.

Earnings Whispers?

Our proven model does not conclusively show that Estee Lauder is likely to beat earnings this quarter. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 to surpass earnings estimate. However, that is not the case here due to the following factors:

Negative Zacks ESP: ESP for Estee Lauder is -1.82%. This is because the Most Accurate estimate stands at 54 cents a share, while the Zacks Consensus Estimate is pegged at 55 cents.

Zacks Rank:Estee Lauder carries a Zacks Rank #3 (Hold) which when combined with a negative ESP lowers the predictive power of ESP.

We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Here are some other companies that investors may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:

Vitamin Shoppe Inc. VSI, Earnings ESP of +1.47% and a Zacks Rank #2 (Buy).

Coca Cola Femsa KOF, Earnings ESP of +11.25% and a Zacks Rank #3 (Hold).

Church & Dwight Co. Inc. CHD, Earnings ESP of +1.37% and a Zacks Rank #3.