First Read L’Oréal Broad based beat

Research evidence excerpt

First Read L’Oréal Broad based beat

Forecast returns

Forecast price appreciation 12.1%

Forecast dividend yield 2.1%

Forecast stock return 14.2%

Market return assumption 7.8%

Forecast excess return 6.4%

Company Description

L'Oréal is the world's largest beauty company. Its major business lines are consumer products

(nearly 40% of sales), luxe (another ~40%), professional hair care (~10%) and active

cosmetics (~10%). Some 30% of sales are concentrated in Europe, with a particular strength

in France. Emerging markets contribute c45% of revenues. Leading brands include L'Oréal

Paris, Lancôme, Garnier, Yves Saint Laurent and Maybelline. Recent acquisitions include IT

Cosmetics, Atelier Cologne, ModiFace, Stylenanda and Logocos.

Valuation Method and Risk Statement

We derive our price target from DCF, assuming a WACC of 7.4% - based on a risk free rate of

3.0% and an equity risk premium of 6%, and a terminal growth rate of 3.5%. Our base case

assumes a medium term OSG of 7% and an annual EBIT margin expansion of c30bps.

The main sources of downside risk to our rating include: 1) a further deterioration in the

China Beauty market, which would result in muted LFL sales growth in the group’s North Asia

region; 2) additional softness in the North American consume environment whereby visits to

hair salons would be less frequent and higher priced innovations getting less traction than in

the past few years; 3) some sudden macro deterioration in Latin America or South Asia which

would make it more challenging for L’Oréal to rapidly roll out its divisions and brands in those

regions.

Primary upside risks would be: 1) fresh rounds of pricing actions in the Beauty industry which

would enable L’Oréal to maintain a LFL sales growth performance in Europe and North