L'Oreal SA manufactures, markets, and distributes health and beauty aids. The company produces colorants, styling, and hair care products for professional hairdressers, hair care, cosmetics, and skin care products and perfumes for consumers, luxury cosmetics and perfumes sold through department stores, perfumeries and travel stores, and dermatological and pharmaceutical products

We maintain our neutral recommendation on L’Oreal with a price target of €162/share. Our neutral recommendation is on the back of no short term catalysts which justify a strong improvement in margins and we do not expect the sales figure to benefit from a weak Euro in the years ahead.

Global growth concerns remain a worry and considering L’Oreal’s exposure to emerging markets, we remain cautious in our forecasts.

Despite our model not factoring in any strong improvement in the company’s performance, we continue to like L’Oreal for the following reasons:

* Market Leader - L’Oreal is the world leader in cosmetic products with a market share of 12.5%. The Group targets fast growth categories in mass markets, to access middle-class incomes and high end developed market users. We expect the company to remain a market leader as it continues to target sales for the mass market and grow through acquisitions

* Sales - Organic sales have grown 5% a year since 2010. We are seeing accelerated growth in the US and most emerging markets. We expect this trend to continue as management targets the mass middle class

* Growth through acquisitions - The Group’s strategy is growth the acquisitions. The current market turmoil has created opportunities for L’Oreal with the opportunity to pick up companies on much more favourable valuations

* North America - L’Oreal is seeing strong growth in North America. We expect sales in the US to remain strong especially as the Group continues to focus on increasing its sales online

* Online sales - The Group is focusing on selling online which till now only represents 5% of sales. The Chinese market contributes 15% of its consumer e-commerce sales and grew 65% in Q315. We expect sales from China to increase in years ahead

* Operating Margins - Despite growth through acquisitions, the Group managed to keep its operating margins close to 17% without large shocks due to new businesses being amalgamated with existing ones in the Group. We do not expect any major changes in its margins in the coming years

* Strong cash position - L’Oreal has a strong cash pile of $10.8bln (net of debt). This can be used for further acquisitions, increasing of the dividend or a share buybacks

Concerns

* Subdued demand in Brazil, and the luxury segment in Hong Kong are reducing the Group’s market share

* Body Shop remains the weak link of the Group

This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co.