Going into Earnings, Are L’Oreal Shares a Buy, Sell or Hold?

Dermatological
Beauty
grew
28.7%
like-for-like
during
the
first
nine
months
of
2023,
to
reach
€4.9
billion
euros
(£4.2
billion)
in
sales,
accounting
for
16%
of
L’Oreal’s
total
revenue
of
€30.6
billion.

Consumer
Products
is
the
largest
division
of
the
company
and
grew
14.5%
on
a
like-for-like
basis
during
the
same
period.

“Production
innovation
and
geographical
expansion
has
been
secular
growth
drivers,
but
the
democratisation
of
knowledge
online
has
turbo-charged
L’Oreal’s
growth
in
recent
years”,
Stifel
analysts
wrote
in
a
report
dated
February
5.
They
see
La-Roche
Posay,
CeraVe
and
Vichy
brands
as
among
“the
most
recommended
brands
by
doctors
online”.

Overall,
L’Oreal
fourth-quarter
revenue
is
expected
to
reach
€11
billion,
while
full-year
revenue
should
reach
€41.5
billion,
based
on
Factset
data.

Earnings
before
interest
and
taxes
is
seen
at
€8.2
billion
for
the
full
year
(€7.5
billion
in
2022).
Net
income
and
EPS
are
seen
at
€6.5
billion
and
€12.15
per
share,
respectively
(compared
with
€6.1
billion
and
€11.26).

Morningstar
Key
Metrics
For
L’Oreal

• Fair
Value
Estimate:
€388;
• Current
price:
€456;
• Morningstar
Rating:
★★;
• Morningstar
Economic
Moat
Rating:
Wide;
• Morningstar
Uncertainty
Rating:
Medium.

Who
is
Bullish
and
Bearish
on
L’Oreal?

Investors
will
definitely
focus
their
attention
on
2024
outlook
for
the
company
and
how
it
will
withstand
less
buyoant
consumption
in
its
key
regional
markets.

“We
expect
L’Oreal
to
continue
outperforming
the
broader
beauty
industry
in
the
full-year
2024,
with
like-for-like
of
+8.3%,
above
consensus
of
7.5%”,
Morgan
Stanley
analyst
Sarah
Simon
says.

Analysts
at
Bank
of
America
Securities,
meanwhile,
calculate
that
L’Oreal’s
like-for-like
growth
has,
on
average,
been
1.2
times
higher
than
the
global
beauty
market
between
2010
and
2019.
The
pace
of
growth
accelerated
during
the
pandemic
but
should
normalise
from
2023
onwards.

UBS
analysts
are
more
sceptical,
however.
They
consider
that
it
“unlikely”
L’Oreal
will
be
able
to
report
a
fourth
consecutive
year
of
double-digit
like-for-like
sales
growth
in
2024.

“For
L’Oreal’s
like-for-like
sales
growth
to
exceed
10%
in
2024
would
require:
a)
additional
pricing
actions
in
the
key
regions
of
North
America
and
Europe;
and/or
b)
a
market
rebound
in
the
China
beauty
market
from
early
2024,”
they
wrote
on
January
15.

“At
this
stage,
both
events
appear
unlikely
owing
to
some
consumer
softness
(especially
in
the
US)
and
rapidly
declining
inflation
rates
and
persistent
muted
demand
for
Beauty
products
in
China”.

What
Will
Happen
to
L’Oreal
in
2024?

Morningstar
analyst
Dan
Su
estimates
L’Oreal’s
fair
value
is
€388
per
share.

This
estimate
factors
in
“steady
increases
in
beauty
demand
globally
across
key
categories
(at
a
mid-single-digit
rate
each
year,
per
Euromonitor)
and
L’Oreal’s
ability
to
slightly
outpace
the
overall
market
given
its
strong
brand
positioning,
expansive
distribution
infrastructure,
and
room
for
market
share
gains
in
the
highly
fragmented
beauty
sphere”.

“We
expect
luxury
and
derma-based
product
sales
to
exceed
the
corporate
average,
expanding
by
8%
and
11%
annually
to
make
up
40%
and
20%
of
total
sales,
respectively,
by
2032,
versus
38%
and
13%
in
2022,
given
its
innovation
pipeline
complemented
by
acquisitions,”
he
says.

Morningstar
expects
operating
margins
to
expand
by
220
basis
points
to
21.7%
at
the
end
of
our
10-year
forecast
period,
relative
to
2022.

“The
margin
expansion
is
driven
entirely
on
the
gross
margin
line,
driven
by
price
mix
improvements
from
a
sharper
focus
on
luxury
and
on
revenue
growth
management
initiatives,”
he
continues.

“L’Oreal
will
continue
expending
significant
resources
toward
research
and
development
and
marketing,
with
such
spending
averaging
north
of
3%
and
31%,
respectively,
generally
consistent
with
historic
levels,
which
we
see
as
crucial
to
reinforcing
L’Oreal’s
brand
standing
and
pricing
power”.

Why
Does
L’Oreal
Have
a
Wide
Economic
Moat
Rating?

Su
believes
L’Oreal
has
carved
out
a
Wide
Economic
Moat
thanks
in
part
to
strong
brand
equity
associated
with
a
well-balanced
beauty
portfolio,
tight
retailer
partnership,
and
a
competitive
cost
structure
in
sourcing,
manufacturing,
and
marketing.

“The
brand
intangible-
and
cost
advantage-driven
moat
has
enabled
L’Oreal
to
deliver
returns
on
invested
capital
(including
goodwill)
that
exceeded
our
estimate
of
its
7.4%
weighted
average
cost
of
capital
over
the
past
decade,
and
we
project
excess
investment
returns
to
continue
over
the
next
20
years,”
he
says.

L’Oreal’s
leading
market
shares
reflect
strong
brand
equities
built
over
the
years
“with
heavy
investments
in
lab
research
and
marketing
that
reinforce
efficacy-based
product
differentiation
and
keep
its
brands
top
of
mind
for
beauty
shoppers
in
developed
and
emerging
markets
alike”.

He
adds:

“We
see
structural
factors
in
the
$360
billion
global
beauty
market
as
conducive
to
L’Oreal’s
brand
equity.
Driven
by
an
ingrained
human
desire
to
look
and
feel
better
with
the
help
of
beauty
products
and
rising
purchasing
power
in
emerging
markets,
consumers
spent
$41
billion
more
on
beauty
purchases
in
2022
compared
with
10
years
ago,
according
to
Euromonitor,
and
it
expects
the
overall
market
to
expand
at
6%
annually
over
the
next
five
years,
after
rebounding
to
prepandemic
levels
in
2022
(4%
above
2019)”.

L’Oreal
Shares:
What
Are
The
Risks?

Morningstar
assigns
L’Oreal
shares
a
Medium
Uncertainty
Rating,
based
on
long-term
structural
tailwinds
for
beauty
products.
That
said,
the
firm
is
not
immune
to
macroeconomic
headwinds
and
geopolitical
tensions
that
could
weigh
on
consumer
demand.

“L’Oreal
distributes
its
products
in
more
than
150
countries,
yet
has
centralised
manufacturing
for
derma-based
and
professional
products
in
Europe
and
for
luxury
products
in
the
US,
Europe,
and
Japan,”
Su
says.

“As
such,
the
firm
depends
on
stable
trade
policies
and
collaborative
global
supply
chains
to
ensure
timely
and
cost-effective
delivery
of
its
products.
Major
reversal
of
open
trade
policies
and
transportation
bottlenecks
are
risks
that
could
thwart
its
growth”.

The
proliferation
of
online
marketplace
and
digital
marketing
has
disrupted
the
beauty
market
by
lowering
entry
barriers
and
accelerating
the
commercialisation
of
new
concepts,
and
particularly
in
makeup.
As
such,
Su
believes
L’Oreal
remains
a
leader
in
e-commerce
and
online
advocacy,
thanks
to
consistent
investment
in
consumer-facing
technologies.
Even
so,
we
expect
the
onslaught
of
beauty
entrants
to
continue
amid
evolving
consumer
beauty
needs
and
shopping
preferences.

The
highly-visible
global
brands
owned
by
L’Oreal
are
also
constantly
under
the
scrutiny
of
consumers
given
the
ubiquity
of
mobile
phones
and
social
media.
Any
brand
messaging,
consumer
experience,
social,
or
sustainability
practice
that
is
perceived
to
be
inconsistent
with
the
company’s
positioning
could
be
brought
under
the
limelight.

Without
a
timely
and
appropriate
response,
therefore,
brand
damage
and
a
hit
to
volume
demand
and
pricing
power
could
ensue.
That
said,
we
don’t
expect
environmental,
social,
and
governance
risks
will
materially
affect
L’Oreal’s
operational
results
and
investment
returns
over
the
long
term.

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