L’Oreal: Solid Beauty Demand, Innovation, and Tight Channel Ties To Fuel Top Line; Shares Overvalued

We are raising our fair value estimate for L’Oreal OR to EUR 376 (from EUR 336), which implies a 31 times multiple against our 2024 earnings estimate. The increase is driven by higher annual sales growth assumptions (7.0% versus 6.2% in the prior model), alongside faster growth (7% versus 6% previously) in earnings before interest (excluding tax) in the decade following the 10-year explicit forecast period. That said, we view L’Oreal shares as slightly overvalued, trading at an 8% premium to our intrinsic valuation, and would wait for a better risk/reward opportunity before building a position in this name.

Our 7% annual sales growth forecast over the next 10 years is driven by our expectation for mid-single-digit growth in beauty demand and L’Oreal’s ability to outpace the overall market given its strong brands and expansive global distribution. Specifically, we expect luxury and derma-based products (38% and 13% of 2022 revenue) to be key growth drivers, expanding sales at 8% and 11% annually, respectively, thanks to demand tailwinds, L’Oreal’s innovation pipeline, and recent acquisitions. However, we expect consumer products (36% of 2022 sales) to remain a laggard (sales up 5% annually) given stiff competition in the mass segment. We forecast a 220-basis-point operating margin expansion to 21.7% in 2032, relative to 2022, driven by gross margin gains of the same magnitude (to 74.6% in 2032) due to a high concentration of more profitable luxury fare in its mix and efficiency gains. We hold spending in research and advertising as a percentage of sales stable in 2032 relative to 2022 levels and believe such spending levels are necessary to reinforce L’Oreal’s differentiation in efficacy and consumer experience.

We haven’t wavered in our belief that L’Oreal has carved out a wide economic moat around its category-leading beauty portfolio, thanks to strong brand equity backed by expertise in research and marketing, and significant scale-based cost advantages.