Thursday, May 9, 2019

A Current AIM International Equity Holding: L’Oreal ADR (LRLCY, $54.67): “Because it’s Worth it” By: Gino F. Piscopo, AIM Student at Marquette University


 L’Oreal ADR (LRLCY, $54.67): “Because it’s Worth it”
By: Gino F. Piscopo, 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’Oréal ADR (LRLCY): Manufactures and sells beauty and hair products. It operates through four segments: Professional Products, Consumer Products, L’Oréal Luxe, and Active Cosmetics.

• 33.14% and 23.18% is owned by Ms. Françoise Bettencourt Meyer and Nestlé, respectively. This has consistently been beneficial to external shareholders due to their alignment of interests and plethora of independent directors.

• World leader in beauty which is their sole business in 150 countries.

• ESG rating of AAA and received the first place price for gender equality in business.

• Strong growth in developing countries ensured LRLCY has traded in line with the S&P 500 and our international benchmark.

Key points: 

L’Oréal was first pitched in the fourth quarter of 2015 with a price target of $43.11. Still, much of the investment thesis is still valid due to the alignment of interests between Ms. Françoise Bettencourt Meyer, Nestlé, and external shareholders. Management has been able to capitalize on growing beauty trends abroad. In 2018 the Asia/Pacific region represented ~28% of sales compared to ~20% in 2015.

Additionally, with 505 patents they still have a moat surrounding their leading market place in the world. This will allow LRLCY to continue to experience strong sales growth and margin expansion.

As the most recognized and world leading beauty organization, L’Oréal will be less affected by an economic slowdown or recession because of the 150 countries they sell their products in. On the other hand, if these developing countries continue their strong growth LRLCY is posed to capitalize.

Lastly, L’Oréal’s ESG rating has been unchanged at AAA since 2015. Management has strong initiatives to capture demand for natural products. They have launch products like Botanicals Fresh Care and Biolage R.A.W. in 2017 to suit the demands of their consumers. Additionally, at the forefront of their annual presentation LRLCY states they reduced CO2, waste, and water consumption by 77%, 37%, and 48%, respectively.

What has the stock done lately?

Since being pitch L’Oréal has outperformed the market because of their patent moat and position in emerging markets. We bought LRLCY around $35.48 and it currently trades at $54.70 giving the international consumer staples sector within our fund incredible performance.

Past Year Performance:  

LRLCY has increased 13.87% in the past year and is up 19.02% year-to-date. Recent earnings releases have increased public sentiment on this stock. L’Oréal is currently trading at a 34.14x P/E multiple ~50% higher than its 5yr average.


Source: FactSet
My Takeaway:

This stock has performed well since being pitched in 2015 and has increased ~19% just this year. Plus, by looking at their P/E multiple LRLCY looks very expensive. Nonetheless, I still have faith this company is in a good position to capitalize on continual growth in emerging countries while also surviving an economic slowdown.


Source: FactSet



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