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L’Oréal urges every customer to splurge on its products “because you’re worth it”. Investors may now wonder whether the €225bn French hair and skincare behemoth deserves its lofty valuation.
A rare mishap in the fourth quarter knocked the stock down an ugly 7 per cent on Friday. Harsh? Perhaps not.
To begin with, L’Oréal’s problem was specific to its North Asia region. Sales there account for almost 30 per cent of the group total. These were down 6.2 per cent in the quarter on a like for like basis, against consensus expectations of 7.3 per cent growth, a big miss. The rest of its markets have been broadly fine.
Secondly, the stumble could be a blip. The Chinese government has cracked down on daigou, shoppers who buy cosmetics in lower-tax areas such as Hainan and South Korea, and then sell them on for a profit in mainland China. That had already hit third-quarter results and appears to be a temporary phenomenon — although one might have hoped that mainland shoppers might pick up the slack.
If the miss is rare, limited in scope and likely temporary, L’Oréal’s investment narrative should remain untarnished. The beauty group has exposure to one of the fastest growing areas of the home and personal care space, skincare.
Its scale means it can spread R&D spending and overheads over €41bn of turnover. It increases margins 30 basis points a year and invests rising cash flow on a vast advertising and promotion budget, worth more than 30 per cent of sales. That should raise earnings by over 10 per cent annually, says Barclays.
All this misses a key point. L’Oréal is not priced for its growth prospects, which are indeed strong and intact. Its valuation, at 34 times forward earnings, reflects safety and strength. It has a diversified footprint across regions and categories, and has produced growth across all of these backed by its heavy marketing spend.
But so do other consumer product giants. L’Oréal trades at twice the multiple of other businesses such as Unilever and Reckitt Benckiser, although these are lumbering beasts by comparison.
More to the point, it carries a 40 per cent premium to the fast expanding luxury juggernaut LVMH. That sort of gap is only justified if L’Oréal is a significantly safer bet. If, however, the group’s flawless finish starts to wear off, its valuation has further to fall.
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