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Biden uses Veto in ESG battle
President Biden is expected to implement the first veto of his presidency as Congress looks to pass anti-ESG legislation.
Current rules allow fiduciaries of private companies’ pension funds to include environment, social and governance considerations in their investment decisions. Relevant factors include greenhouse-gas emissions and workforce diversity.
But two Democrats, including Joe Manchin, have joined forces with Republicans to vote to roll back this rule. Biden’s Presidential veto allows him to kill this bill (unless Congress can muster up a 2/3rds majority to override him - a level of bipartisanship that seems impossible in today’s political climate).
Republicans have framed ESG as damaging profits and investment returns, although in fact ESG is fundamentally focused on long term investing and is therefore especially relevant to pension funds.
We hope that the GOP’s antagonism can help to drive more data-driven transparency across investing platforms and policies to reduce the stigma around sustainable investing.
STOCK PICK: L'Oréal
We wrote about L'Oréal in December, and so far this year, L'Oréal SA stock is up 14.8%, far outpacing the broader market. Here’s what we like about this stock:
Resilient sales growth: worldwide sales rose 19.7% in Q3 2022, and were particularly strong in the under-tapped markets of South Asia Pacific, Middle East and North Africa (SAPMENA)
Growing industry: the beauty sector is set to grow nearly 6% CAGR through 2026 and L'Oréal has one of the leading market positions here, with a brand value of ~$38bn and about 35% of all global revenue.
Strong e-commerce segment: 28.9% of L'Oréal sales were online in 2021. It acquired artificial intelligence leader ModiFace in 2018, and is using AI and augmented reality technology to virtual try-ons for cosmetics sold through Amazon. L'Oréal has also invested heavily in technology solutions like hair diagnostic and skincare formulation services.
Healthy balance sheet: total debt to equity is only 0.31 (vs 0.87 for Estée Lauder and 1.29 for Unilever).
ESG values: L'Oréal is the only company ever to be awarded a ‘AAA’ rating by CDP for seven years in a row, and has allocated €30.8 million to support over 1.2 million women in vulnerable situation throughout the world. This will strengthen L'Oréal’s brand value in emerging markets and ensure the company remains popular with Gen-Z in Europe and NA.
L'Oréal just reported its full year 2022 results, with revenue up 19%, net income up 25% and a healthy profit margin of 15%. Shares were up 2% on the news at time of writing. EPS was a mild miss, and the AGM is set for April 21, so we’ll see if this gets raised at the meeting. It’s also set to pay out a healthy 1.5% dividend, which isn’t massive but is a nice bonus on top of consistent share gains (17.2% CAGR over the past 5 years, without re-investment).
L'Oréal is trading at a forward p/e of 31.7, way above the S&P500’s 17.1. But we like L'Oréal as a long term prospect. With its portfolio of AI projects, it deserves a tech-like valuation, and a strong track record of growth, even during last year’s inflationary crisis, demonstrates a resilient business. The reversal of the USD gains against the Euro should help Euro stock valuations and provide a boost to L'Oréal’s U.S business.
If you want to buy a good quality retail company that dominates a growing business - particularly to trade on the strength of the growing consumer discretionary market in SAPMENA - this is the stock for you.
Mars boss slams “nonsense” criticism
Mars Inc, CEO Poul Weihrauch doubled down on his company’s ESG commitments in an interview this week. Predicting that sales at the confectionary company would double to $90bn within a decade, he said that the focus was “responsible” growth. “We don’t believe that purpose and profit are enemies.”
Had had harsh words for companies that greenwash their public image but don’t genuinely commit to ESG targets. Employees “won’t stay with us if we don’t care about ESG … if I walk out of this office and I take a 25-year-old associate that has joined us from university they will want us to do this”.
Despite being privately owned, Mars has been vocal about its efforts to cut greenhouse-gas emissions, and intends to spend $2.7bn on its sustainability agenda in the next three years. Last year, the company came under fire from Fox News, which criticized its “woke” advertising campaign. Weihrauch called on politicians to “take more responsibility,” and described conservative attacks on ESG as “a nonsense conversation.”
OUR TAKE: Mars’s allegedly “woke” ad generated 25 billion online impressions, proving once again that sustainability sells.
Note:
All opinions are the author’s own. This is not investment advice. Please consult your financial advisor before making investment decisions.
Disclosure:
The SMM and its writers do not have a position in L'Oréal SA, but may buy, increase or sell a position at any time.
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