Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
Beauty names came under pressure following the Trump administration’s tariff announcements on April 2, mainly reflecting investor concerns over higher costs for products from Europe. US-based Estee Lauder EL and Coty CTY sold off 15% and 7%, respectively, while price movements were milder for Europe-based peers L’Oreal LOR (negative 2%) and Puig PUIG (negative 5%).
We acknowledge an extended period of such tariffs will likely impact financial results of beauty companies by pushing up costs and dampening demand. However, given the possibility of policy reversals pending US-EU negotiations, we are not incorporating the tariff scenario in our base-case valuation for now. Moreover, given considerable pricing power with gross margins averaging over 70% in our US and European beauty coverage, coupled with flexibility in global supply chains, we see room for beauty names to maneuver and offset the tariff impact. Specifically, Estee, L’Oreal, and Coty all have operated factories within the US for decades, which should afford flexibility to relocate production to lower tariff exposure. Small fragrance specialist Puig only has factories in Europe and India, but we expect the firm can leverage the high-end positioning of its European brands to pass on some of the tariff impact through price increases.
As such, we are maintaining our fair value estimates for wide-moat Estee ($120) and L’Oreal (EUR 410) as well as no-moat Coty ($9.6 and EUR 9.3) and Puig (EUR 22). While all four names are trading at discounts, we see Estee as presenting the most attractive risk/reward mix, trading 50% below our fair value estimate.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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