China’s recent interest-rate cuts positively influenced the stock of a prominent cosmetics company.
Shares of Estee Lauder (ticker: EL) saw an upward movement today following the announcement that China’s central bank has decided to lower interest rates to bolster the economy. Given that China is a pivotal market for Estee Lauder and the company has experienced difficulties in this region, the positive stock reaction was expected. By 12:37 p.m. ET, the shares had risen by 4.1%.
China’s stock market saw broad gains today, particularly among consumer-facing companies, after the People’s Bank of China reduced mortgage rates and interest rates by 50 basis points. This measure aims to spur lending within the economy. Additionally, the central bank lowered the required reserve ratio for banks, releasing an estimated $142 billion for new loans.
Estee Lauder stands to benefit significantly from these economic measures. The company’s stock experienced substantial growth during the pandemic due to strong demand for skincare products from China. However, more recently, the weak economy has negatively impacted its performance. Despite recent challenges, China remains a crucial market for Estee Lauder. For the fiscal year ending June 30, the Asia/Pacific region, predominantly comprising China, accounted for nearly one-third of Estee Lauder’s revenue. A resurgence in Chinese sales could be highly advantageous, as the market has historically been very profitable for the company.
In the most recent earnings report, Estee Lauder management noted that economic weakness in China was a primary factor behind a 3% revenue decline in the Asia/Pacific region for the fiscal fourth quarter.
While the 50-basis-point rate cut by China’s central bank alone might not be sufficient to rejuvenate Estee Lauder’s stock fully, it is worth watching. The company’s stock has declined by over 75% from its peak, presenting a potential opportunity for recovery. Given Estee Lauder’s vast portfolio of well-recognized global brands, a comeback remains plausible in the longer term.
Jeremy Bowman, the author of this article, does not hold any position in the stocks mentioned. The Motley Fool also holds no positions in any of the mentioned stocks and maintains a disclosure policy.