Wednesday, January 31, 2018

A current AIM International Fund Holding: L'Oreal SA ADR. (LRLCY) by Stephen Lane. "$LRLCY remains a Hold"

L’Oreal SA ADR (LRLCY, $45.51): “$LRLCY for the #SELFIE Generation”

By: Stephen Lane, AIM student at Marquette University



Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

L’Oreal SA ADR (OTC:LRLCY) is a manufacturer and seller of beauty and hair products. They operate in four main segments: Professional products (hair salons), Consumer products (retail), L’Oreal Luxury (department stores) and Active Cosmetics (pharmacies & drugstores). L’Oreal is headquartered in Paris France and was founded by Eugene Schueller in 1909.

• Today, LRLCY is seeing a 4% year-over-year organic growth in sales from increased volumes.

• LRLCY maintains dominance in cosmetics by having a well-diversified portfolio and market.

• There has been an increase in concern about the lag in penetration from the Chinese market as LRLCY is seeing large competition from local brands.

• With a slowing growth seen in the beauty market, LRLCY is taking proactive actions to increase their presence and market share in new/emerging markets.

Key points: After acquiring several skincare brands last year L’Oreal is continuing to see very positive impacts. That being said, the positives are offset by a negative impact from FX. As expected these acquisitions have increased the revenues and market share in the skincare division but at the same time L’Oreal saw a slowing of market share in two other divisions.

In today’s very trigger-happy world, L’Oreal has done a good job at maintaining a respectable environmental, social and governance (ESG) rating. The beauty industry is often highly scrutinized their usage of chemicals. L’Oreal has started increasing its transparency by having a fragrance ingredient disclosure. In addition, the company committed to using 100% renewable raw materials from sustainable sources by 2020. L’Oreal is well equipped for the trend toward more natural and organic products (54% of ingredients), appealing to the newer generations of consumers.

While L’Oreal is a leader in the cosmetic market and all the previous points are very positive and encouraging it is important to know that the beauty market is seeing a slowing. Currently it is growing at about 3.5% while in the past it was above 5%. In addition, the Consumer Products division failed to outpace the market for the last couple years. The market has also seen an increase in niche brands threatening L’Oreal’s market share.

What has the stock done lately?

In the last year L’Oreal has successfully integrated their acquisitions and led the industry in sales grown from an increase in volume not price. They have positioned themselves as being the high quality and affordable company.

The selfie obsessed generation are spending more on beauty products than the average consumer. Millennials have made makeup (26% of L’Oreal’s sales) the fastest growing cosmetic globally. L’Oreal has increased their online presence by developing partnerships with key bloggers and vloggers. When compared to their peers L’Oreal’s brands ranks very highly for their online presence.

Past Year Performance: Over the past year L’Oreal has achieved a price high of $45.71, a low of $36.14 and is currently at $45.51. Their growth in new markets was 8.1%, 2.5% in Western Europe and 2.3% in North America. Management continued to improve their margins while increasing research and development. While last year L’Oreal’s debt to equity ratio was concerning the repurchasing throughout 2017 has continued to strengthen their shareholder return.


My Takeaway: Management has been proactive on the trends of the market and they have successfully integrated their acquisitions. L’Oreal currently dominates the industry with a 12.6% market share in cosmetics. This dominance is due to the combination of an increased presence in the e-commerce market and the utilization of more natural and organic ingredients. L’Oreals transition from traditional marketing and sales channels has given them a great advantage over their competition. While the slowing of growth trend in the market is concerning, L’Oreal has shown they are willing to adapt and continue to grow. L’Oreal in the last four years has grown about 57% and is at the forefront of product development. They have very respectable financials and will continue to dominate the cosmetic industry for years to come. This is a HOLD recommendation.

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