On Wednesday, JPMorgan issued a downgrade for L'Oreal SA (OR:FP) (OTC: LRLCY), changing its stock rating from Neutral to Underweight. The financial institution also revised the beauty company's price target, lowering it from EUR390.00 to EUR325.00. The downgrade comes amidst concerns of a rapidly weakening global beauty market and the potential impact on the company's growth and premium rating.
The downgrade reflects JPMorgan's outlook on L'Oreal's future performance, citing a normalization of growth to about 4-5% over 2025-26, a rate not observed since 2017. The analyst pointed to the deceleration in China, a significant growth driver for L'Oreal since 2017, which has been somewhat counterbalanced by the company's diverse market approach, with strong growth in the US, Western Europe, and emerging markets.
Despite L'Oreal's successful execution over the past four years, JPMorgan anticipates that the company's top-line growth will face challenges due to several factors. These include normalizing pricing, weakening end-demand in skincare and makeup, and reduced capacity to outperform as the rollout of its Derma white space is largely complete. Additionally, the emergence of local competitors such as Proya and ELF is expected to influence L'Oreal's market position.
The forecast suggests a growth path of 4.5% in the fiscal year 2025, compounded by limited short-term visibility on potential destocking in developed markets. While L'Oreal has historically managed to maintain profitability during periods of slower top-line growth, JPMorgan predicts a deterioration in profit and loss delivery. This is expected to be due to a weakening gross margin outlook, which may only be partially offset by a lower advertising and promotion ratio.
In other recent news, Jefferies, a prominent financial services company, upgraded L'Oreal's stock rating from Underperform to Hold, setting a new price target of €365.00, up from the previous target of €362.00. This decision came after a reassessment of L'Oreal's performance compared to its global Home and Personal Care peers.
The analyst noted a significant change in L'Oreal's market dynamics since 2018, with the company not only experiencing a boost in market growth but also increasing its outperformance from about 10% between 2014 and 2017 to 30-40%.
Despite expectations for market growth to return to pre-2018 levels, the analyst believes L'Oreal will maintain its current outperformance gap. This revised outlook for L'Oreal's stock is based on the premise that while market growth may normalize, L'Oreal's robust performance relative to the market can continue. The new price target is based on a 26x target price-to-earnings ratio or 16.3x enterprise value to earnings before interest, taxes, depreciation, and amortization.
InvestingPro Insights
Adding to JPMorgan's analysis, recent data from InvestingPro provides further context to L'Oreal's current market position. Despite the downgrade, L'Oreal maintains a strong financial foundation. The company boasts impressive gross profit margins, with the latest data showing a gross profit margin of 74.15% for the last twelve months as of Q2 2024. This underscores L'Oreal's ability to maintain profitability even in challenging market conditions.
However, aligning with JPMorgan's concerns about valuation, InvestingPro Tips indicate that L'Oreal is trading at a high P/E ratio relative to its near-term earnings growth. The current P/E ratio stands at 30.26, which may suggest the stock is priced at a premium compared to its earnings potential.
On a positive note, L'Oreal has demonstrated commitment to shareholder returns, having raised its dividend for 4 consecutive years. This could provide some stability for investors during a period of potential market volatility. For those seeking a more comprehensive analysis, InvestingPro offers 13 additional tips for L'Oreal, providing a deeper dive into the company's financial health and market position.
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