L'Oréal S.A. (OR.PA)

Equity
France
Consumer Cyclical

RISK

RETURN

Key risk factors

Negligible price volatility

Strong & resilient to price shocks

Low default risk

Key return factors

Very strong margins and returns

Greatly overvalued vs peers

Decent dividends

Company profileL'Oréal S.A., through its subsidiaries, manufactures and sells cosmetic products for women and men worldwide. The company operates through four divisions: Consumer Products, L'oréal Luxe, Professional Products, and Active Cosmetics. It offers shampoos, hair care products, shower gels, skin care products, cleansers, hair colors, styling products, deodorants, sun care products, make-up, perfumes, etc. The company provides its products under the L'Oréal Paris, Garnier, Maybelline New York, NYX Professional Makeup, Essie, Niely, Dark and Lovely, Lancôme, Yves Saint Laurent Beauté, Giorgio Armani Beauty, Kiehl's, Urban Decay, Biotherm, Ralph Lauren, IT Cosmetics, L'Oréal Professionnel, Kérastase, Redken, Matrix, Biolage, Pureology, Decléor, Carita, Vichy, La Roche-Posay, SkinCeuticals, Roger&Gallet, CeraVe, Stylenanda, Mixa, Magic Mask, Prada, Helena Rubinstein, Valentino, Mugler, Shu Uemura, Viktor&Rolf, Azzaro, Diesel, Atelier Cologne, Cacharel, and Yue Sai brands. It sells its products through distribution channels, such as hair salons, mass-market retail channels, perfumeries, department stores, pharmacies, drugstores, medispas, branded retail, travel retail, and e-commerce. L'Oréal S.A. was founded in 1909 and is headquartered in Clichy, France.

Valuation: Greatly overvalued

Multiple

TTM

NTM

P/E

38.70

35.40

PEG

4.40

P/B

8.20

6.70

P/S

5.80

5.40

P/FCF

39.10

18.10

EV/EBITDA

25.70

25.20

From both historical and forecast perspectives, the stock is considerably overpriced compared to similar stocks. Specifically, the stock is expensive' on P/E, overvalued on EV/EBITDA, and reasonably priced on P/FCF.

Performance: Mixed

The stock's performance has been mixed in the past six months, with growth following a decline. There is no clear price trend compared to its global peers from the same sector and industry (as shown above). The stock has outperformed this peer group by 1ppts over past six months and grown 0ppts faster in the past month. This is largely true for peers from the same country and sector. With respect to the stock's valuation against its peers, its overall price performance is neutral.

Analyst view: Somewhat favourable

The average target price is 481 and suggests 8% upside potential. Usually, this means a HOLD recommendation among investment firms. This neutral recommendation suggests no significant price movement, up or down, in the next 12 months. The most optimistic analyst has a target price of 530.0. This translates into 18% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 340.0. This is equivalent to 24% downside potential in the worst case.

Profitability: Very strong

RoE

L'Oréal S.A. reported a return on equity (RoE) of 21.3% in the last 12 months, down from 22.0% in FY23. The market consensus projects an RoE of 21.7% in FY24, again ahead of its peers.

RoA

Another important profitability metric, return on assets (RoA), amounted to 11.9% in the last 12 months, a decrease from 12.5% in FY23. The market analysts predict that RoA will be 11.7% in FY24, again stronger than its peers.

RoCE

In the last 12 months, the return on capital employed (RoCE) declined to 16.7%, above the peers. The consensus estimate for FY24 for RoCE is 21.9%, again ahead of the peers.

Net margin

EBITDA margin

Historically, OR.PA has reported strong net margins compared to its global peers. Specifically, in the last 12 months, this metric equalled 15.0%, a growth from 14.9% in FY22. The company has reported average EBITDA margins compared to its global peers in recent years. EBITDA margin amounted to 23.0% in the last 12 months, a decline from 23.9% in FY23.

RoIC / WACC = 3(strong value creation)

The ratio of return on invested capital (RoIC) to the weighted average cost of capital (WACC) has been 3.0 in the past several years. This ratio implies a strong shareholder value creation.

Growth: Average

Revenue

EBITDA

EPS

Free cash flow

OR.PA reported revenue of EUR 41 182mn in the last 12 months, up 8% from FY22. At the same time, the dynamics of cash flow, as measured by free cash flow (FCF), were drastically different. EPS grew 8% from FY22 to EUR 11.55. Market expects EPS to reach EUR 12.97 in FY24.Revenue growth has been constrained in the past several years (negative-to-neutral), while EBITDA growth has been weak. This all contributed to continued EPS growth (positive-to-neutral). The FCF trend is in line with EBITDA. On the positive side, EBITDA dynamics is very stable.

Dividends: Decent

Dividend paid

Dividend yield

The company has a track record of regular dividend payments. It has paid dividends in each of the past ten years. Dividend per share (DPS) has grown yearly, and there is a clear trend. In the past 12 months, the dividend yield has been moderate and on par with its peers. On average, the company pays dividends annually.

Default risk: Low

The risk of default is low. We note strong positions in its industry, resilient historical revenue growth, robust profitability, solid return on capital, strong debt servicing capacity, adequate interest coverage, solid cash flow generation, and an favourable capital structure, among the positive credit factors. Among the negative credit factors, we point to poor working capital management.

Volatility: Negligible

In normal market circumstances, OR.PA is not volatile. Put differently, without outstanding market volatility or shocking company news, the stock's price will stay within a narrow range. The stock's losses on its worst days (less than 1-5% of the time) will range from very low to negligible.

Stress-test: Negligible

In highly turbulent market conditions, OR.PA is not volatile. In other words, the stock will fall far less than the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be very low.

Selling difficulty: Low

OR.PA boasts high trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually very stable and is unfavourable on the days with the lowest activity. However, under highly turbulent market conditions, the trading volume tends to improve significantly.

Country risk: Very low

The institutional, legal, and compliance risks associated with the company's country are minimal. In combination with stringent business standards, shareholder rights are very highly protected.

Other risks: Negligible

No other major risks have been identified.