L’Oreal
August 27, 2010
Stock price: €77.4
Conclusion: L’Oreal’s return to market share gains coupled with good visibility on the margin front justify its current valuation. H1 results lead us to reiterate both our estimates and our valuation range (€83-€86 per share).
H1 results: Sales up 10.2% reported to €9.7bn (+6.3% organic)-EBIT +21%-Net earnings +16.5% to €1.4bn-EPS +15.3%. No guidance for the year, but management confident to strengthen positions and profitability.
We find the current valuation sustainable for three reasons.
Superior visibility on the top line front
-New markets are driving cosmetics growth (+3+4%). New markets account for more than half of the total market and close to 90% of global growth (+9.5% in H1). Asia and Latam grew respectively by 10% and 13% in H1, more than offsetting flat demand in Western Europe and only 2% growth in the US. Management expects new markets to continue to fuel growth in H2 and beyond 2010.
-L’Oreal is expanding 1.5x faster than peers. L’Oreal outperformed competitors everywhere, in new markets (+13%) but also in the US (+5%) and in Western Europe (+2%). Innovation should again drive sales in H2, notably Lancome (Teint Miracle) YSL (Rouge Pur), new perfumes (Belle d’Opium, Acqua di Gioia, and Big Pony Collection from RL). We expect new markets to account for 37% of sales in 2010 and to become the first zone next year ahead of Western Europe.
Positive leverage
-Pricing remain under control with +0.7% net price impact in H1 unlike some competitors.
- Gross margin should be slightly up this year, helped by productivity gains, purchasing and distribution savings and positive mix less hedging costs.
-Commercial and administrative costs will decrease as a percentage of sales, more than compensating for higher advertising and promotion expenses.
We look for sales up 12.4% to €19.6bn, EBIT margin to reach 15.5% and net earnings to increase 16.8% to €2330m (minor change vs our previous estimate due to higher taxation).
Very strong balance sheet
-We look for €2.2bn free cash in 2010
-Net debt could fall to €760m by the end of december and L’Oreal could turn net cash positive next year (€700m).
-According to management acquisitions in emerging markets should remain the priority in the future.
L’Oreal trades at 17.3xP/E and 9.4xEV/EBITDA (excluding Sanofi-Aventis) based on our 2011 estimates. We think such a premium looks justified by its superior visibility but leaves little upside for the next 12 months.
