Tag: European Market

Across the globe, per capita consumption of beauty products is on the rise, driven by a steady gain in the purchasing power of the middle class, particularly in emerging markets where L’Oréal sourced 48% of 2020 revenue. Consumers in Eastern Europe and Latin America spend one third of the level that developed market consumers spend on beauty, while consumers in Asia and the Middle East spend only 20%. One trait of L’Oréal that sets it apart from its peers is its wide-reaching, well-balanced portfolio across mass, prestige, salon, and medical/dermatological channels. 

The firm is adept at pivoting resources to the best opportunities, helping stabilize sales. During the pandemic, L’Oréal allocated resources to the most resilient channels (e-commerce, dermatological), categories (skincare) and geographies (China), allowing it to greatly outperform the market. In 2020, L’Oréal’s like-for-like sales contracted just 4% despite the widespread closure of stores and salons, half that of the 8% drop of the global beauty market. This diversification has also served it well in recessionary climates. Heading into the great recession of 2008 and 2009, L’Oréal was reporting high-single-digit revenue growth. In 2008 and 2009, revenue decelerated to 2.8% and negative 0.4%, respectively, before rebounding to 11.6% in 2010.

Financial Strength

After digesting L’Oreal’s third-quarter sales, increasing fair value estimate to EUR 233 from EUR 225 to account for material outperformance in the professional and active cosmetics segments. After a 4% drop in like-for-like sales in 2020, as salons and most retailers were closed for a portion of the year because of the pandemic, organic revenue will rebound 14% in 2021, then normalize at a mid-single-digit pace thereafter. L’Oréal traditionally carries a very low level of debt, generally less than cash on hand. The business generates a significant amount of cash, and as such, internally generated cash flow has been sufficient to fund the business’ needs. 

Over the past three years, free cash flow (cash flow from operations less capital expenditures) as a percentage of sales averaged 17%, comparable to our 16% average annual expectation over the next five years. The company prides itself on its long history of annual dividend increases, which will persist with the exception of 2020 due to the pandemic, with our model calling for high-single-digit increases in annual dividends in 2021 and thereafter, maintaining a 50% payout ratio throughout the course of our 10-year explicit forecast. The firm to spend 4.5% of sales on capital expenditures each year, generally in line with the historical average.

Bulls Say’s

• With 48% of revenue sourced from emerging markets, L’Oréal is ideally positioned to benefit from growth of the expanding middle class.
• L’Oréal is the only beauty company with exposure across mass, prestige, professional, and medi-spa, and the firm’s leading positions in these channels make L’Oréal a valued partner for retailers.
• L’Oréal has a strong management team with an excellent track record for competently executing the firm’s strategy, which has led to its defensible competitive edge, stability of earnings given diverse market exposure, and consistent ROICs above WACC.

Company Profile 

L’Oréal, founded in 1909 by Eugene Schueller when he developed the first harmless hair colorant, is the world’s largest beauty company. It participates primarily in skincare (39% of 2020 revenue), makeup (21%), haircare (26%), and fragrance (9%). L’Oréal is a global firm, with 27% of its revenue sourced from Western Europe, 25% from North America, and 48% from emerging markets (35% Asia-Pacific, 5% Latin America, 6% Eastern Europe, and 2% Africa/Middle East). The firm sells its products in many channels, including mass retail, drugstores/pharmacies, department stores/perfumeries, hair salons, medi-spas, branded freestanding stores, travel retail, and e-commerce. The firm’s top selling brands are Lancôme, Yves Saint Laurent, Maybelline, Kiehl’s, L’Oréal Paris, Garnier, and Armani.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

As a result of the coronavirus downturn the group is embarking on a cost and fleet restructuring program, which will see it emerge as a smaller business. In 2020, the group received a government-backed support package totaling EUR 9 billion, which included an equity stake of 20% by the German government for EUR 306 million. 

As part of the approval process the European Commission required the group to surrender 26 slots at its Frankfurt and Munich hubs to new competitors. Despite the recent EUR 2.1 billion rights issue, the group remains highly indebted, which may require additional capital restructuring if cash flows don’t recover to suitable levels to de-leverage organically. Due to the group’s indebtedness and highly uncertain timing of a recovery in cash flows, there is still a wide range of possible outcomes for the group’s equity value.

Financial Strength

Lufthansa is in a weak financial position due to its high levels of indebtedness. The coronavirus pandemic dealt a heavy blow to the aviation industry, resulting in record losses, cash outflows, and growing debt levels. To bolster liquidity, the group agreed to a EUR 9 billion government support package, which included the German state taking a 20% ownership in the group. Net debt, including pension provisions of EUR 7.6 billion, at the end of June 2021 equated to EUR 18 billion. The group has since raised EUR 2.1 billion in equity capital through a rights issue concluded in October 2021, the proceeds of which will be used to repay state aid. The group’s pro-forma net debt and liquidity position after the capital increase is expected to be EUR 16 billion and EUR 7.7 billion, respectively. Despite the capital raise, we believe the group remains highly geared, with a net debt to pre-pandemic EBITDA ratio of 3.5 times, and it will require multiple years of deleveraging to restore the balance sheet to sustainable levels.

Bulls Say’s

• COVID-19 presents the group with a unique opportunity to structurally lower its cost base and emerge from the crisis with better profitability.
• The airline has dominant positions at the key European hubs of Frankfurt and Munich, which could be an early beneficiary of a recovery in air travel.
• Fleet reduction through the retirement of older and less efficient aircraft could lead to a more rational fleet with higher load factors and unit revenue.

Company Profile 

Deutsche Lufthansa is a European airline group. The company operates under the Lufthansa, Swiss Air, Austrian Airlines and Eurowings brands. In 2019, the company carried 145 million passengers to its network of 318 destinations globally. The group’s main airport hubs are Frankfurt, Munich, Vienna and Zurich. The company generated sales of EUR 36.4 billion in 2019.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.