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L’Oréal SA – Potential upside in shares remain

The cosmetic group's shares have done well

L'Oreal shares have performed well. Photo: Shutterstock

L'Oreal shares have performed well. Photo: Shutterstock

About the Shares

L’Oréal shares are up 10% year-to-date and 100% over a period of 5-years.
This excellent performance is not a coincidence. It is a result of strong earning results and confidence in management’s ability to deliver growth and profitability for shareholders.

Price Target of €195 per share

We have a price target on L’Oréal of €195 per share. Our overweight recommendation is a result of an improvement in our financial forecasts for 2018 and beyond. We are now more confident that the group is well positioned to reach our projections. L’Oréal has also proved to be resilient in difficult times.

Our €195 price target is based on the following expectations:

1. We expect revenues and margins to continue to grow in 2018 and beyond, mainly driven by a stronger innovation program. Management re-iterated its view that L’Oréal will continue to outperform its market and deliver “sales and profit growth.”

2. We continue to see increased sales in the make-up business which accounts for most of the organic sales growth we are seeing at group level.

3. Momentum in both the mass and selective channels has improved and we expect this positive trend to continue in the coming years mainly through innovation and increased market shares through acquisitions.

4. Management are focusing on growth in emerging markets. We are seeing potential there both from an improvement in the standard of living as well as an increase in population.

5. The company has strong net cash position enabling the group to continue increasing its market share through acquisitions, increase dividends and/or buyback shares

Potential for further growth

• World sales leader in the global beauty market followed by Unilever and Proctor & Gamble

• We are confident that the Group will continue to increase its sales across all regions as it continues to:
        o Gain from economies of scale
        o Grow through acquisition – L’Oréal made seven acquisitions in the past two years. We expect management to continue increasing market share by buying additional companies at more attractive prices due to global growth concerns
        o Focus on growth in emerging markets as we are seeing the middle class in these markets continue to increase. Management is targeting this new middle class in order to continue increasing its top line

• Growth in ecommerce – Growth through sales over the internet is something which a lot of companies are focusing on. We continue to see growth from online sales and expect this to continue as the company continues to add additional products to its online portal.

The negatives

• Global growth concerns remain a worry

• Increased competition in competition could be a threat to increasing market share

• Currency headwinds

About the Company

L’Oréal is a global cosmetics group that operates in 130 countries worldwide with major brands including L’Oréal Paris, Garnier, Lancôme, The Body Shop and Maybelline New York.

Disclaimer: 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 Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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