(News Bulletin 247) – The Swiss bank went from buying to neutral on value, judging its premium sufficiently high compared to its peers, while visibility is less good than in the past on the beauty market.

Cosmetics champion L’Oréal lived up to its rank last year. The group’s shares gained 35% in 2023, ranking eighth in the CAC 40, the best performance among the “KOHL” (Kering, L’Oréal, Hermès, LVMH).

In a complicated luxury and beauty market, with demand normalizing and China leading an offensive against the gray market, the company managed by Nicolas Hieronimus has held up well thanks in particular to its ability to redirect its sales where the growth is the most promising. In the third quarter, the company exceeded expectations everywhere except in China, where its sales fell by almost 5% on a comparable basis.

Last year’s good stock market performance legitimately raises doubts about the company’s potential in 2024. This Monday UBS chose to abandon its buy recommendation on the value, thus switching to “hold” with an objective course reduced to 475 euros compared to 495 euros previously.

As a result, L’Oréal shares seized up somewhat, falling 4.3% around 4:10 p.m., the most pronounced decline in the CAC 40.

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A high premium

“To be clear, our opinion on the strength of the company’s fundamentals has not changed,” says UBS. Only with the excellent performance of 2023, L’Oréal has significantly increased its lead over its peers in the consumer goods sector, in terms of valuation multiples.

UBS calculates, based on expected profits this year, that the stock trades at 33 times anticipated profits compared to 20.6 times for the entire European Food and HPC industry, i.e. say food and household consumer goods. L’Oréal currently trades at a 60% premium to the industry average, compared to a five-year historical average of around 50%.

“While we view the group’s strong premium over the sector as fully justified – due to L’Oréal’s better like-for-like growth prospects and its virtuous profit growth model – we see only one limited room for further revaluation of the stock from now on,” explains UBS.

Furthermore, the Swiss bank estimates that the company will have difficulty surprising already relatively high expectations, with the consensus counting on growth of 7.5% on a comparable basis (UBS itself is at 7.7% in its forecasts) and on an increase in the operating margin of 30 basis points (0.30%) in 2024.

Expectations that are difficult to surprise

Furthermore, visibility is relatively limited according to the Swiss bank, while the company’s valuation seems to imply another year of robust growth in the sector.

“In North America and Europe, last year’s pricing actions contributed significantly to marked improvements in like-for-like sales growth for European beauty names (i.e. L ‘Oréal and Beiersdorf)”, recalls UBS.

“We are therefore concerned that the rapid weakening of the price contribution and a weaker consumer environment (particularly in the United States) could signal a return to more moderate growth for the beauty market. Thus, we model a return to average single-digit growth for L’Oréal in both regions (Europe and the United States, Editor’s note), compared to 14% in 2023,” continues the bank.

Furthermore, in China and Asia, UBS warns that the rebound in “travel retail”, that is to say sales in transport transit locations (stations, airports) appears for the moment “highly hypothetical” and is unlikely to be a catalyst for action.

L’Oréal will publish its annual results on February 8.