L'Oréal (LRLCY -0.66%) is often considered a dependable blue-chip stock for long-term investors. Over the past 10 years, the French cosmetics giant generated a total return of about 250% and easily outperformed its American competitors, Revlon (REV) and Coty (COTY 1.17%).
Should investors still buy L'Oréal today as a defensive hedge against inflation, rising rates, and other macroeconomic headwinds? Let's review three reasons to buy the stock -- and one reason to sell it -- to decide.
Image source: Getty Images.
1. It's well-insulated from macro headwinds
L'Oréal's business model is well-insulated from both inflation and higher interest rates. Cosmetics are essential consumer staples, which generally retain their pricing power in inflationary markets, and shoppers remain loyal to certain brands instead of simply buying the cheapest products.
A large portion of L'Oréal's portfolio -- which includes Lancôme, Maybelline, NYX Cosmetics, and Garnier -- also serves more affluent consumers who largely retain their spending power through economic downturns.
That's why it wasn't surprising when L'Oréal CEO Nicolas Hieronimus said in late May at the World Economic Forum that inflation had "no impact" on the company's business thus far. Meanwhile, Revlon recently filed for bankruptcy protection as it grappled with inflation, supply chain disruptions, and liquidity constraints. Coty and Estée Lauder (EL 2.08%) also cited inflation as a major headwind in their latest earnings reports.
L'Oréal also doesn't need to fret over rising interest rates because it's firmly profitable. Its net cash flow rose 3% to 5.65 billion euros ($5.93 billion) in 2021, and it ended the year with a low debt-to-equity ratio of 0.15. That fortress balance sheet makes it a very attractive investment in this volatile market.
2. Core businesses are firing on all cylinders
Between 2011 and 2021, L'Oréal's annual revenue rose at a compound annual growth rate (CAGR) of 4.7% and its earnings per share (EPS) increased at a rate of 7.4%.
The company suffered a rare slowdown in 2020 as the pandemic shut down businesses, curbed global travel, and caused more people to stay at home and purchase fewer cosmetic products. However, growth accelerated significantly across all four of its main business segments in 2021 as those headwinds waned.
|
Revenue Growth (YOY, Like-for-like) |
2019 |
2020 |
2021 |
|---|---|---|---|
|
Professional |
3.2% |
(6.4%) |
24.8% |
|
Consumer |
3.3% |
(4.7%) |
5.6% |
|
L'Oréal Luxe |
13.8% |
(8.1%) |
20.9% |
|
Active cosmetics |
15.5% |
18.9% |
31.8% |
|
Total |
8% |
(4.1%) |
16.1% |
Data source: L'Oréal. YOY = Year-over-year. "Like-for-like" is based on a comparable business structure and identical exchange rates.
L'Oréal's high-growth active cosmetics division -- which houses premium skincare brands like La Roche Posay, Vichy, and CeraVe -- notably doubled its annual revenue over the past four years and accounted for 12% of its top line in 2021.
The company's rapid recovery was also buoyed by brisk sales in China, where its sales surged by the double digits in 2021, and strong e-commerce sales -- which rose 26% during the year and accounted for 29% of its top line. In 2019, its e-commerce business generated less than 16% of its revenues.
Analysts expect L'Oréal's reported revenue to rise 13% in 2022 and grow another 6% in 2023. Those stable estimates indicate the company should continue to grow even if the market sinks into a global recession.
3. Operating margins are expanding
As the world's largest cosmetics company, L'Oréal's scale enables it to maintain much higher operating margins than most of its competitors.
|
Operating Margins |
2019 |
2020 |
2021 |
|---|---|---|---|
|
Professional |
20.1% |
18.8% |
21.3% |
|
Consumer |
20.2% |
20.4% |
20.2% |
|
L'Oréal Luxe |
22.6% |
22.4% |
22.8% |
|
Active cosmetics |
23.3% |
25.4% |
25.2% |
|
Total |
18.6% |
18.6% |
19.1% |
Data source: L'Oréal.
Analysts expect L'Oréal's total operating margin to hold steady at 19.1% this year before expanding to 19.5% in 2023. By comparison, Coty and Revlon posted operating margins of 8.8% and 5%, respectively, in 2021. Estée Lauder, which generates more stable returns than those two weaker American counterparts, ended last year with an operating margin of 18.9%.
Based on those expectations, analysts expect L'Oréal's EPS to increase 23% this year and grow another 8% in 2023.
The one reason to sell L'Oréal: Its valuation
L'Oréal's main weakness is its valuation. It already trades at 31 times forward earnings. Coty and Estée Lauder trade at 17 and 29 times forward earnings, respectively. That higher multiple could make L'Oréal less appealing than other consumer staple plays as investors rotate away from pricier growth stocks.
But as a L'Oréal investor, I'm not too concerned about its higher valuation. Its multiple might limit its upside potential this year, but I believe its evergreen cosmetics business will continue to grow for decades to come. It also continues to reward its investors' patience with a forward dividend yield of 1.6%.
Simply put, I believe L'Oréal's strengths justify its premium valuation, and its recent retreat from its all-time highs represents a good buying opportunity for long-term investors who can tune out all the near-term noise.
