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Technical Support Could Limit Estee Lauder's Slide

EL expects weaker-than-projected fourth-quarter earnings

by 5/4/2012 11:20:48 AM
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Estee Lauder Companies, Inc. (EL - 61.61) this morning revealed a fiscal third-quarter profit of $130.4 million, or 33 cents per share, up from its year-ago profit of $124.7 million, or 31 cents per share. Excluding items, earnings arrived at 38 cents per share. Revenue edged up 3.8% to $2.25 billion. EL's results were solid, as Wall Street was looking for a slimmer bottom line of 33 cents per share on $2.25 billion in sales.

Looking ahead, the New York City-based company believes its current-quarter adjusted profit will range between 11 cents and 16 cents per share, while analysts are anticipating a per-share profit of 20 cents. EL is also predicting fiscal 2012 earnings between $2.21 and $2.26 per share, while sales are projected to increase by 10%. Analysts are looking for $2.24 per share in earnings on $9.65 billion in sales.

Traders have reacted harshly to these results, knocking EL down more than 3.5% so far today. Nonetheless, the stock is still sitting on a 15% year-to-date gain, and a roughly 35% 52-week gain. In fact, this upswing pushed the shares to a new all-time best of $65.60 just one week ago. Currently, EL is testing its footing in the $60-$62 region, which has acted as a technical backstop since mid-March.

Weekly

Ahead of earnings, optimism seemed to be growing in the options pits, as evidenced by EL's 10-day call/put volume ratio of 1.37 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This ratio is in the 70th percentile of its annual range, signaling that speculators on these exchanges have made bullish bets over bearish at a faster pace than usual during the past couple of weeks.

However, this recent trend toward calls may not be as bullish as it would initially appear. Short interest on the equity increased 7.6% during the past two reporting periods. Consequently, it's possible that a portion of the recent call volume was the result of hedging activity by the shorts.

The brokerage crowd also looks to be upbeat toward EL. While there are 10 "buy" or better endorsements, there are five tepid "holds" and one "strong sell" suggestion.

Considering EL's lackluster guidance, a change of heart from options traders or upbeat analysts could pressure the stock in the near term. However, should the shares continue to hold steady above familiar technical support, any downside could be short-lived.

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