L’Oréal (EPA: OR) is the world’s largest personal care, hair and cosmetics company headquartered in France. We think its great ESG track record and recent acquisition announcement with French biotech company Microphyt are evidence of reliable growth that should appeal to long-term investors.
Stock Fundamentals
L’Oréal has strong fundamentals, having received a ‘buy’ rating from both Bernstein and Deutsche bank this month. L’Oréal has a market cap of €191 billion and generated €9.58 billion in sales last quarter - about 35% of the total revenue of the global beauty industry. L’Oréal was named the “world’s most valuable cosmetics brand” by beauty branddirectory.com, and is undisputedly the cosmetics industry leader.
L’Oréal shares are up 11% in the past month and 90.53% in the past 5 years, almost double the S&P 500’s 5-year performance (48.15%). L’Oréal topped Q3 earnings with $3 diluted EPS (vs street $0.79) on revenue of 9.18B (up 20.8% Y/Y).
Sales growth has strong been despite inflationary headwinds. Worldwide sales rose 19.7% in Q3 2022, led by the a boost in the SAPMENA zone (South Asia Pacific, Middle East and North Africa) which grew 41.5% Y/Y.
Its shareholder base has been loyal, with L’Oréal taking the top award the ‘Grand Trophee d'Or’ for the best individual shareholder relations amongst the top 40 French listed companies in December 2022.
Market Fundamentals: Beauty and Beauty Tech
The personal care and beauty industry is forecast to grow nearly 6% CAGR through 2026- L’Oréal is well positioned to benefit from this.
Drivers of structural growth such as e-commerce, digitalization, and growing consumption particularly in emerging markets has led to a significant expansion of the personal care and beauty industry.
As more people are entering the middle-income bracket in Asia, Africa and South America, an established yet affordable global brand like L’Oréal is set to benefit. China and India also offer key growth opportunities given L’Oréal’s long recognizable history in both regions to become synonymous with globalization and a household name.
L’Oréal’s exposure to e-commerce and tech has paid off. Deriving 28.9% of sales (as of 2021) from online, the expected 10% growth of beauty and personal care sales as a proportion of all online sales by 2025 is one which L’Oréal is well positioned to harness.
Years ahead of the beauty tech trend, L’Oréal has been making great tech partnerships with Alphabet's precision health arm Verily to acquiring tech companies such as ModiFace. The global beauty tech market is hit a double-digit growth rate, far outpacing the broader market. By investing in product and service innovations that combine tech with beauty such as hair diagnostic and skincare formulation services, L'Oreal is strategically developing its competitive advantage, supporting top line growth in the years ahead.
Strategic Partnership and ESG: Acquisition of Microphyt
L'Oréal's venture capital fund acquires a minority stake in Microphyt in the strategic partnership. Microphyt develops natural and renewable ingredients such as microalgae which are used in cosmetics. L’Oréal’s acquisition can streamline supply chains, make production more efficient and spark innovation in the industry on a mass scale.
This is likely to enhance L’Oréal’s existing expansion from organic and inorganic growth while tapping into changing consumer trends.
This also accelerates hitting the goals of L'Oréal's 2030 sustainable development program. The firm has demonstrated a long commitment to ESG, particularly in its Water Policy which tackles water quality, supply and security- a major rising issue.
Risks
L’Oréal trades at a p/e ratio of 36 - acceptable for such an established and resilient brand, but still lofty if valuations continue to fall across the board.
Risks include competition from other local players such Korean, Japanese and Chinese beauty brands gaining popularity where the younger generation are encouraged to buy more local brands linked to cultural heritage rather than international. This is the main reason for the banks’ consensus split between buy and hold.
Our take
With strong stock fundamentals and a particularly strong balance sheet (total debt to equity at only 0.24 compared to rivals Estée Lauder’s 0.93 and Unilever’s 2.83), L’Oréal demonstrates an attractive buy.
They are well placed to benefit from the broader industry expansion and the accelerated growth of beauty tech with established Alphabet partnerships in place.
Although some concerns surround competition and high stock pricing, L’Oréal’s global dominance- particularly in emerging economies is a key factor in long term strength.
Their recent acquisition of Microphyt and ESG commitment can lead to long term leadership in beauty tech and sustainability which may drive continued revenue and profit growth against competitors.
Note:
All opinions are the author’s own. This is not investment advice. Please consult your financial advisor before making investment decisions.
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