L'Oréal(ENXT: OR)(OTC: LRLCY) might seem like a great stock to buy as inflation, rising interest rates, and other macro headwinds rattle the broader markets. The French cosmetics giant -- which also owns Lancôme, Maybelline, NYX Cosmetics, and Garnier -- mainly targets higher-income consumers who are better insulated from those economic shockwaves.
L'Oréal's sales dipped in 2020 as brick-and-mortar stores closed and people stayed home during the pandemic. But its sales recovered quickly in 2021 as the lockdowns ended and people went out again, and its growth remained resilient this year, largely defying the inflationary headwinds.
Image source: Getty Images.
But despite that recovery, L'Oréal's Paris-listed shares still declined 26% year to date, while its U.S.-listed American depositary receipt (ADR) shares tumbled about 35% as the euro weakened dramatically against the U.S. dollar. Does that pullback represent a good buying opportunity for patient investors who can tune out the near-term noise?
L'Oréal's core businesses are still growing
L'Oréal operates four main business segments: Professional (which generated 12% of its revenues in the first nine months of 2022), Consumer (37%), L'Oréal Luxe (38%), and Active Cosmetics (14%). All four businesses recovered quickly from the pandemic last year and then continued generating stable growth throughout the first nine months of 2022.
Metric (Like-for-Like*) | First Nine Months of 2022 | 2021 | 2020 | 2019 |
|---|---|---|---|---|
Professional revenue growth | 10.9% | 24.8% | (6.4%) | 3.2% |
Consumer revenue growth | 8.7% | 5.6% | (4.7%) | 3.3% |
L'Oréal Luxe revenue growth | 12.2% | 20.9% | (8.1%) | 13.8% |
Active cosmetics revenue growth | 22.6% | 31.8% | 18.9% | 15.5% |
Total revenue growth | 12% | 16.1% | (4.1%) | 8% |
Data source: L'Oréal. Percents are year-over-year. *"Like-for-like" is based on a comparable business structure and identical exchange rates in both periods.
L'Oréal's growth was still throttled this year by COVID-19 restrictions in China, one of its fastest-growing markets. However, its double-digit growth in the U.S., Europe, Latin America, and other markets more than offsets that slowdown.
CEO Nicolas Hieronimus said that "despite the current uncertainties," L'Oréal remained "confident in the outlook for the global beauty market, which has again confirmed its resilience; confident in our power to innovate; and confident in our ability to outperform the market and achieve another year of growth in sales and profits in 2022."
L'Oréal's margins are expanding
L'Oréal's focus on higher-end brands gives it plenty of pricing power, while its scale enables it to generate stable operating margins. That's why its operating margins have expanded over the past two and a half years.
Metric | First Six Months of 2022 | 2021 | 2020 | 2019 |
|---|---|---|---|---|
Professional operating margin | 21.2% | 21.3% | 18.8% | 20.1% |
Consumer operating margin | 20% | 20.2% | 20.4% | 20.2% |
L'Oréal Luxe operating margin | 24% | 22.8% | 22.4% | 22.6% |
Active cosmetics operating margin | 27.7% | 25.2% | 25.4% | 23.3% |
Total operating margin | 20.4% | 19.1% | 18.6% | 18.6% |
Data source: L'Oréal. European companies only report their operating margins on a semi-annual basis.
L'Oréal gradually raised its prices over the past year to counter rising production costs, but that strategy hasn't throttled its sales growth yet. Analysts expect its operating margin to rise to 19.4% for the full year.
There are still plenty of catalysts on the horizon
L'Oréal's core business is strong, but its stock was dragged down with other European stocks amid concerns about the Russia's invasion of Ukraine war and soaring energy prices across the continent.
The weakness of the euro is a double-edged sword: It increases the value of its overseas sales, but it makes its own shares worth less to overseas investors. The company's growth in China should also remain soft as the zero-COVID lockdowns drag on.
Despite facing all these challenges, analysts still expect L'Oréal's revenue and earnings per share to grow 18% and 33%, respectively, this year.
If you believe L'Oréal's current problems will drag on for years, it might not be a great investment. But if you believe those macro headwinds will eventually dissipate, it's still a solid long-term investment. L'Oréal's stock isn't cheap at 28 times next year's earnings, but I believe its brand appeal and resistance to inflation should justify that slight premium.
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Leo Sun has positions in LOreal (ADR). The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
