Stock price: €82.8 ($105.23 USD)
Conclusion: H1 sales confirm L'Oreal's (OTCPK:LRLCY) return to market share gains. We revise our EPS and valuation target, thanks to the strong positive impact expected from forex. Our valuation range (€83-€86 per share) suggests that the stock looks close to its fair price.
H1 sales: up 10% reported (+12.5% Q2), up 6.3% organic (+5.2% Q2). Guidance 2010: management confident to increase sales and profits.
Looking for 5.5% organic growth (vs 6% previously due to Europe)
- New markets should account for the bulk of growth (70%) based on +11.5% projected for the year. H1 was very strong in Latin America, Asia and Russia. We assumed +10% in H2 (vs +13% in H1) which will face tougher comps, notably in Q4.
- North America is doing OK and we expect the growth rate to stay around 4% in H2, vs 4.9% in H1.
- Western Europe (+2% in H1+1% in Q2) should remain the weak spot. Q2 was even weaker than expected reflecting a depressed environment. We look for +1.8% full year (+1.5% in H2).
- Organic growth should be broad-based, around +5% in both consumer and professional products and +7.5% in prestige, which will continue to benefit from easy comps in H2. L’Oreal should outperform the market, expected to grow +3+4% this year.
EPS growth towards high teens, boosted by a weak Euro.
- Forex could boost EPS by around 7% this year, based on translation. In addition, COGS and administrative expenses should benefit from the weakness of the Euro. However, part of the gain will be offset by hedging costs.
- Pricing could remain slightly positive, despite increasing pressure in Europe. According to management, Q2 was in line with Q1, up 1%.
- Although, advertising and promotion spending remained stable as a percentage of sales in H1, management hinted that spending may slightly increase for the full year, as a result of intense promotional activity and higher advertising expenses .
- We expect all divisions to report a progress in margin, with the highest gain in prestige (+200bp), helped by top line growth recovery and the turnaround at YSL.
- By region, new markets and the US should report higher profitability. We assumed that Europe could remain flat the full year, owing to subdued growth coupled with increased investments in H2.
- All in all, we look for €19.6bn sales-15.5% EBIT margin-€2.35bn earnings-EPS €4.04 (+18%).
L’Oreal looks fairly priced, trading at 20.5xP/E and 11.5xEV/EBITDA (ex Sanofi),based on our 2010 estimates.
We think L’Oreal should seize acquisitions opportunities in India and Latin America. We would also welcome a review of its existing portfolio of brands and the potential disposal of some of them (Helena Rubinstein, Cacharel, the Body Shop, as to Ralph Lauren the jury is out..)
