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Argus Research Sees a Pretty Picture at L'Oreal

We are initiating coverage of L’Oreal Inc. (LRLCY), the world’s largest cosmetics company, with a "buy" rating, explains John Staszak, equity analyst with Argus Research.

L’Oreal benefits from its strong brand reputation, premium cosmetic products, expanding e-commerce business, and significant presence in Asia.

On February 7, L’Oreal reported results for 2018 — a particularly good year for the company’s three most powerful growth drivers. First, e-commerce revenue grew more than 40% and accounted for 11% of revenue.

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Second, Travel Retail (airport sales) crossed the 2 billion euro mark for the first time, with an increase of 27%. Lastly, sales in the Asia Pacific region grew 24%, as all four divisions gained market share. Full-year comparable revenue rose 7.1% — the fastest pace since 2007 — to 26.9 billion euros ($30.7 billion).

In constant currency, revenue rose 8.0%. Foreign exchange was a 450-basis-point headwind and reported revenue rose 3.5%. Sales of L’Oreal Luxe high-end cosmetics rose 14.4% to 9.4 billion euros, driven by market share gains in the Asia Pacific region, particularly in China, which saw double-digit growth.

Comparable revenue increased 7.1% in 2018, but we expect revenue to accelerate in 2019 as LRLCY broadens distribution and launches new products.

Based on our expectations for international growth and market share gains, we project 2019 comparable revenue of 29 billion euros, up 7.5%. In 2020, we expect a further 7% increase in comp sales to 31 billion euros.

To support product launches and current products, we expect L’Oreal to spend heavily on advertising and promotions. Nevertheless, we project an operating margin near 19% over the next two years, up from 18.3% in 2018.

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The company’s recent solid results also demonstrate management’s ability to innovate and execute. As such, we expect L’Oreal to post strong revenue and earnings, as well as continued market share gains, over the next several years. Given its clean balance sheet, we also expect the company to continue to raise the dividend and repurchase shares.

Based on its shareholder-friendly policies and strong growth prospects, we believe that L’Oreal currently offers one of the best investment opportunities in the Consumer Staples sector. Our target price of $64, combined with the dividend, implies a total potential return of 26% from current levels.

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