Estee Lauder (EL) impressed during its fiscal first quarter ended October 29 with a well-executed strategy in response to a recessionary macroeconomic outlook and addressed critical issues in its business. 
Estee Lauder makes premium skin care, makeup, fragrances and hair care products, which it sells through various high-end outlets across the globe. The company competes with well-known product manufacturers like Revlon (REV), L’Oreal (OTCPK:LRLCY), Avon Products (AVP) and P&G (PG). Estee Lauder’s brands include Aramis, Clinique, La Mer, Aveda and designer brands such as Donna Karan, Tommy Hilfiger, Michael Kors and Sean John.
We currently maintain a price estimate for Estee Lauder’s stock at $53.28, well below the current market value. However, the recent earnings report signals potential upside to our projections.
Upside to Skin Care Market Share
We estimate that more than half of Estee Lauder’s stock value is generated by its skin care segment. This is primarily due to robust growth in the global skin care market and the rapidly growing demand for anti-aging skin care.
Estee Lauder has harnessed this trend by launching a wide range of anti-aging skin care products including Repairwear Laser Focus Wrinkle & UV Damage Corrector, All About Eyes Serum De-Puffing Night Massage and Youth Surge Night Age Decelerating Night Moisturizer from Clinique.
Estee Lauder’s fiscal year Q1 skin care sales rose 17% year-over-year (YOY) as the company’s Clinique brand gained 0.7 points of market share in the skin care segment between January and September. The company’s namesake Estee Lauder brand also gained 0.2 points of market share during the same timeframe. 
We currently forecast a rise in market share from just over 6% in 2010 to nearly 7% in 2012. If Estee Lauder can increase its market share 50 basis points beyond our estimates by 2012, there could be 4% upside to our $53.28 stock price estimate.
Modify the chart below to see the impact of various skin care market share scenarios on Estee Lauder’s stock value.
Improving Mix of Higher Margin Products
Estee Lauder’s skin care operating income demonstrated a sharp 31% YOY increase during fiscal Q1′10, primarily due to favorable mix impact as sales of higher margin products increased alongside improving macroeconomic conditions.
Further economic recovery (rising employment and disposable income levels) could lead to a further rise in sales of premium products. If this rise in operating income were to continue throughout Estee Lauder’s fiscal year, the company’s EBITDA margin (a measure of the flow-through of sales revenue to operating profit) could reach roughly 20% in 2011, up from its current level of 17.5%. This change alone would produce almost 10% upside to our current estimates.
Modify the chart below to see the impact of various EBITDA margin scenarios on Estee Lauder’s stock value.
Should the two scenarios detailed above materialize, we estimate a 15% increase to our estimated stock value. Despite the potential upside, our price estimate would still remain close to 20% below Estee Lauder’s current market value.
Disclosure: No position