L'Oréal: Investing in Timeless Beauty

L'Oréal is the world’s largest beauty company, with a portfolio that spans skincare, makeup, haircare, fragrances, and dermatological beauty. From globally recognized brands such as L'Oréal Paris and Lancôme to fast-growing dermatological brands like CeraVe and La Roche-Posay, the company combines powerful brands with deep scientific expertise and a global distribution network. With strong positions across mass market, luxury, and professional beauty, L’Oréal has built a business that consistently generates high returns and strong cash flow. The question remains: Does this global beauty leader deserve a place in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do own any shares in L'Oréal at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of L'Oréal, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

L'Oréal is the world’s largest beauty company and is dedicated exclusively to cosmetics and personal care products. Founded in 1909 in Clichy, France, the company operates in more than 150 countries and serves consumers across a broad range of price points and product categories. Its activities span six core beauty categories including skincare, makeup, haircare, fragrances, hair coloring, and hygiene products, making it one of the most diversified players in the global beauty industry. The company organizes its operations into four core divisions: Consumer Products, Luxe, Dermatological Beauty, and Professional Products. This structure allows L’Oréal to serve a wide spectrum of consumers, from affordable everyday products to premium luxury beauty. The Consumer Products division includes globally recognized brands such as L'Oréal Paris, Garnier, and Maybelline New York that are distributed through mass retail channels. The Luxe division focuses on prestige brands such as Lancôme and Yves Saint Laurent Beauty that are sold through department stores, specialty beauty retailers, and travel retail. Dermatological Beauty includes science-driven skincare brands such as La Roche-Posay, CeraVe, and Vichy that are frequently recommended by dermatologists and sold in pharmacies. The Professional Products division serves salons and hairstylists through brands such as Kérastase and L'Oréal Professionnel. L’Oréal’s competitive moat is primarily built on the strength and breadth of its global brand portfolio. The company owns some of the most recognized beauty brands in the world, many of which hold leading positions within their categories. These brands have been built through decades of marketing investment, product innovation, and cultural relevance. Because beauty products are closely linked to identity and consumer perception, strong brands often translate into customer loyalty and pricing power. The company’s portfolio allows it to participate across multiple price tiers, from accessible mass market products to premium luxury skincare and fragrances. Another important advantage is L’Oréal’s ability to cover a wide range of price points, allowing the company to capture consumers at different stages of their purchasing journey. Products within its portfolio range from inexpensive mass market offerings to high-end luxury skincare products priced in the hundreds of euros. This pricing ladder allows consumers to enter the ecosystem through affordable brands and potentially trade up to more premium products over time. The breadth of the portfolio also makes the business more resilient during economic cycles because demand may shift between segments while remaining within the company’s brand ecosystem. Innovation and scientific expertise represent another key component of L’Oréal’s competitive advantage. The company invests heavily in research and development and operates a large global network of research centers dedicated to advancing cosmetic science and dermatological research. This scientific foundation allows L’Oréal to continuously improve product formulations, introduce new technologies, and respond quickly to emerging consumer trends. Its leadership in dermatological skincare has been particularly important in recent years, with brands such as La Roche-Posay and CeraVe becoming some of the most prominent skincare brands worldwide. L’Oréal also benefits from its global distribution scale and long-standing relationships across a wide variety of sales channels. The company distributes products through supermarkets, pharmacies, department stores, salons, specialty beauty retailers, e-commerce platforms, and travel retail. This broad distribution network allows L’Oréal to quickly scale successful products across markets while maintaining strong visibility and accessibility for its brands. The company has also built strong relationships with professionals in the beauty industry, particularly hairstylists. Through its Professional Products division, L’Oréal interacts with millions of stylists worldwide and provides education, training, and digital tools that strengthen its connection with the professional community. By positioning itself as a partner that helps develop the salon industry rather than simply selling products, the company has created strong loyalty among professional customers. Another element of L’Oréal’s moat is its deep understanding of consumer preferences and its ability to anticipate beauty trends. Beauty products are influenced by fashion, culture, and changing consumer expectations, and L’Oréal has demonstrated a strong ability to adapt its brands to evolving trends while maintaining their identity. The company’s brands often become part of the broader cultural landscape, supported by sophisticated marketing, influencer collaborations, and strong digital engagement. Taken together, L’Oréal’s powerful brands, extensive price ladder, scientific expertise, global distribution network, and deep understanding of consumer behavior create a durable competitive moat. By remaining focused exclusively on beauty for more than a century, the company has built specialized capabilities that allow it to continuously innovate, adapt to changing consumer trends, and maintain its leadership position in the global beauty industry.

Management

Nicolas Hieronimus serves as the CEO of L'Oréal, a position he has held since May 1, 2021, making him the sixth CEO in the company’s more than century long history. He graduated from ESSEC Business School in 1985 with a degree in marketing. Nicolas Hieronimus began his career at L'Oréal in 1987 as a Product Manager for Garnier. In 1993, as Marketing Director at Garnier Laboratories, Nicolas Hieronimus developed and launched the Fructis haircare range, which became one of the brand’s most successful global product lines. By 1998, Nicolas Hieronimus advanced to General Manager of the Garnier Maybelline Division in the United Kingdom, where he successfully introduced the Fructis line and the Maybelline New York brand to the British market. In 2000, Nicolas Hieronimus was appointed General Manager of L'Oréal Paris France and later became the International General Manager for L'Oréal Paris. During this tenure, Nicolas Hieronimus repositioned the brand as accessible luxury and expanded its global appeal by developing several successful skincare ranges, including Dermo Expertise, Solar Expertise, and Men Expert. From 2005 to 2008, Nicolas Hieronimus served as General Manager of L'Oréal Mexico, where he strengthened the company’s position in a fast growing emerging market. Nicolas Hieronimus was then appointed General Manager of the Professional Products Division, where he reinforced the division’s leadership in the salon channel and oversaw the successful launch of the Inoa ammonia free hair color line. In January 2011, Nicolas Hieronimus was appointed President of L'Oréal Luxe, a role he held until the end of 2018. In this position, Nicolas Hieronimus transformed the division by modernizing major brands and elevating the consumer experience through stronger retail concepts, digital engagement, and premium service. During this period, Nicolas Hieronimus led several strategic acquisitions including Urban Decay, IT Cosmetics, and Atelier Cologne, while also securing the Valentino fragrance license and extending the long standing partnership with Armani Beauty. On July 1, 2013, Nicolas Hieronimus took on the additional role of President of Selective Divisions, which included Luxury, Active Cosmetics, and Professional Products, and on May 1, 2017, Nicolas Hieronimus was named Deputy CEO in charge of Divisions, positioning him as a key architect of L'Oréal’s global strategy. Since becoming CEO in 2021, Nicolas Hieronimus has focused on accelerating L'Oréal’s leadership in high growth areas such as dermatological skincare, premium beauty, and digital commerce. Under Nicolas Hieronimus’s leadership, brands such as La Roche-Posay and CeraVe have continued to gain global market share, reflecting the growing consumer demand for science based skincare solutions. Nicolas Hieronimus has also emphasized the importance of combining beauty expertise with technology, investing heavily in data driven marketing, artificial intelligence, and digital consumer engagement. Nicolas Hieronimus’s leadership style reflects a deep understanding of consumer behavior, a strong commitment to product innovation, and a focus on maintaining brand desirability across different cultures and markets. Having spent more than three decades within L'Oréal, Nicolas Hieronimus possesses an extensive knowledge of the company’s brands, divisions, and global operations. Given Nicolas Hieronimus’s long experience within the beauty industry and his track record of successfully developing global brands, I believe Nicolas Hieronimus is well positioned to guide L'Oréal through its next phase of growth as the global leader in beauty.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. L’Oréal has historically generated a high ROIC because its business is built around strong brands, innovation, and marketing rather than heavy physical investments. Much of the company’s value comes from the strength of its brands, its deep knowledge of beauty products, and its ability to understand what consumers want. These factors allow the company to earn strong profits without needing to invest extremely large amounts of capital. One reason for the high ROIC is the strength of L’Oréal’s brands. Products from brands such as Lancôme, La Roche-Posay, and CeraVe are trusted by consumers around the world. Because of this trust, L’Oréal can often sell products at prices that are much higher than their production costs. In cosmetics, the cost of ingredients and manufacturing is usually relatively low compared to the final retail price, which allows companies with strong brands to earn high margins. Another reason is scale. L’Oréal sells its products in more than 150 countries, which means the company can develop a product or marketing campaign once and then use it across many markets. When a product becomes successful, it can often be launched globally with relatively limited additional investment. This ability to spread costs across a very large sales base supports strong returns on capital. The beauty industry also generally requires less capital than many other industries. Compared with sectors such as manufacturing or heavy industry, beauty companies do not need extremely large factories or expensive machinery. Because of this, a significant portion of L’Oréal’s profits can be generated without constantly investing large amounts of capital, which helps keep ROIC high.  Over time, this combination of strong brands, global scale, and relatively low capital requirements has allowed L’Oréal to consistently generate returns on capital above 13%. ROIC declined to around 14,2% in 2025, which is the lowest level since 2020. However, this does not necessarily indicate that the business has weakened. Changes in ROIC can occur when profits grow more slowly for a period of time, even if the company continues to gain market share and strengthen its brands. One reason could be higher spending to support growth. Companies in the beauty industry regularly increase spending on marketing, innovation, and brand development in order to maintain their competitive position. When a company increases these efforts, profits may temporarily grow more slowly even though the investments are meant to support long term growth. Another factor is the strong expansion of dermatological skincare. Brands such as La Roche-Posay and CeraVe have grown rapidly in recent years. Supporting this growth requires additional spending on marketing, expanding distribution, and increasing production capacity, which can temporarily reduce returns. Macroeconomic conditions can also influence profitability. Inflation, currency movements, or weaker demand in certain regions can put slight pressure on margins for a period of time. Even with the decline, a ROIC of about 14,2% remains strong and higher than many large consumer goods companies achieve. This suggests that L'Oréal continues to benefit from strong brands, global scale, and pricing power. Looking ahead, ROIC could increase again if recent initiatives begin to translate into stronger profit growth. Continued expansion in higher margin segments such as luxury beauty and dermatological skincare could also support stronger returns. Overall, the long term pattern suggests that L’Oréal continues to generate attractive returns on capital, and the recent decline does not appear to signal a structural problem with the business.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. Equity has grown in most years because L'Oréal has consistently been a highly profitable company. When a company earns strong profits year after year, the value of the business gradually increases, which leads to rising equity over time. This reflects the fact that the company is building more value within the business. One of the main reasons for this is the strength of L’Oréal’s brands. Well known brands such as Lancôme, La Roche-Posay, and CeraVe allow the company to sell products at attractive prices while maintaining strong demand. Because cosmetics often have relatively low production costs compared to their selling prices, companies with strong brands can generate high profits. Another reason equity has increased is the company’s ability to grow globally. L’Oréal sells its products in more than 150 countries and continues to expand in markets where demand for beauty products is rising. As the company grows its sales and strengthens its market position, the overall value of the business tends to increase as well. Equity reaching an all time high in 2025 is therefore not surprising. It mainly reflects many years of strong profitability and steady growth. If L’Oréal continues to strengthen its brands, expand globally, and maintain its leadership in areas such as skincare and luxury beauty, equity is likely to continue growing over time, although the pace of growth may vary from year to year.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. L'Oréal has consistently generated strong free cash flow and high free cash flow margins. This is mainly a result of the company’s highly profitable business model and relatively modest investment requirements compared with many other industries. One important reason is the company’s strong margins. In 2025, L’Oréal reported a gross margin of 74,3%, the highest level in its history, and an operating margin above 20%. Beauty products often have relatively low production costs compared with the prices consumers are willing to pay for trusted brands. Because L’Oréal owns some of the most recognized beauty brands in the world, it can maintain strong pricing and high profitability. When margins are high, a large portion of revenue eventually turns into cash. Another reason is that the business does not require extremely large ongoing investments in factories or equipment. In 2025, capital expenditure was about €1,5 billion, representing only around 3,4% of sales. This means that most of the company’s profits can be converted into cash rather than being reinvested in large physical assets. L’Oréal has also improved how efficiently it runs its business. For example, the company has become better at managing how much inventory it holds and how quickly money moves through the business. When products are sold faster and operations run more smoothly, the company receives cash more quickly. Because of this, L’Oréal generated about €7,2 billion in operating cash flow in 2025. In simple terms, the company was very effective at turning its profits into real cash. The strong growth of high margin categories has also supported free cash flow. Segments such as luxury beauty and dermatological skincare continue to expand rapidly. Brands such as La Roche-Posay, CeraVe, and Lancôme are particularly profitable and help drive strong earnings and cash generation. L'Oréal uses its free cash flow in several ways. One important use is returning cash to shareholders. In 2025, the company paid €3,9 billion in dividends and also spent about €0,5 billion on share buybacks. Another portion of the cash is used to acquire brands that strengthen the company’s portfolio and support future growth. In 2025, L’Oréal spent about €2,4 billion on acquisitions. Looking ahead, the company’s strong brands, high margins, and global scale suggest that it should continue to generate strong free cash flow. If L’Oréal continues to grow in high value segments such as dermatological skincare and luxury beauty, and if it maintains its strong profitability, free cash flow is likely to remain high over time. While the exact level may fluctuate from year to year depending on investments and economic conditions, the underlying business model is well suited to generating strong cash flow. The free cash flow yield is at its highest level since 2017. While this does not necessarily mean that the shares are trading at a cheap valuation, it does indicate that the shares are trading at their most attractive valuation in many years. However, we will revisit valuation later in the analysis.

Debt

Another important aspect to consider is debt. It is crucial to assess whether a business has a manageable level of debt that can be repaid within a period of three years. This can be evaluated by dividing total long-term debt by earnings. When analyzing the financials of L'Oréal, it becomes clear that the company’s debt is very manageable. Based on this calculation, L’Oréal would be able to repay its debt in 1,34 years, which is well below the three-year threshold. For that reason, debt is not a concern for me. Management has also emphasized its commitment to maintaining financial flexibility. When L’Oréal sold part of its stake in Sanofi, a portion of the proceeds was used to repay debt, reinforcing this approach. Management has also stated that even after recent transactions such as the Galderma investment and the acquisition of Kering Beauty, leverage is expected to remain below 1x. This means the company still has plenty of financial flexibility to pursue additional opportunities if they arise. Given this disciplined financial strategy, I do not expect debt to become a concern for L’Oréal in the future.

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Risks

Travel retail is a risk for L'Oréal because a meaningful portion of its luxury beauty sales has historically been generated through duty-free channels in Asia, particularly in locations such as airports, Korea duty-free stores, and Hainan’s duty-free shopping zones. These locations attract international travelers who often purchase premium cosmetics and skincare products, making travel retail an important distribution channel for luxury brands. When travel flows, regulations, or retail operations in these areas are disrupted, sales can decline quickly. One of the main recent challenges has been the Chinese government’s intensified crackdown on Daigou activities. Daigou refers to individuals or groups who buy luxury goods abroad and resell them to consumers in China, often to bypass higher domestic prices or import restrictions. For many years, Daigou sellers purchased large quantities of products in travel retail locations such as Korea and Hainan. Because of this, Daigou became an important driver of sales in Asian travel retail. Stricter enforcement by Chinese authorities has significantly reduced this activity, which has directly affected demand in duty-free channels. Another issue is that the Asian travel retail market itself has been going through a broader reset. Although Hainan has received a lot of attention as a major duty-free hub, it represents only about 20% of the total travel retail ecosystem in the region. Other important markets, particularly Korea and Mainland China airport retail, have remained weak. For example, the temporary suspension of the Sunrise duty-paid shopping app in China and changes in airport retail operators in cities such as Beijing and Shanghai disrupted sales and led to lower demand from travel retail partners. These disruptions have reduced the importance of travel retail for L’Oréal in recent years. Travel Retail Asia now accounts for less than 4% of the company’s total sales, compared with more than 6% only three years ago. While this means the direct impact on the overall business is smaller than before, it also highlights how much the channel has been under pressure. The risk for L’Oréal is that the travel retail channel can be quite volatile because it depends on several factors that are outside the company’s control. These include government regulations, tourism flows, airport retail operators, and cross-border shopping behavior. When any of these factors change, demand can shift quickly.

Competition is a risk for L'Oréal because the global beauty industry is highly competitive and constantly evolving. The company competes with several large multinational consumer goods companies such as LVMH, Procter & Gamble, Estée Lauder, and Unilever. These companies operate extensive brand portfolios, have strong marketing capabilities, and compete aggressively across multiple beauty categories including skincare, makeup, haircare, and fragrances. Because many of these companies target the same consumers and retail channels, maintaining market share requires continuous investment in innovation, marketing, and brand building. Another source of competition comes from smaller independent beauty brands. In recent years, so-called indie beauty companies have gained significant traction by quickly responding to emerging consumer trends and building strong connections with niche audiences. Brands such as e.l.f. Beauty have grown rapidly by offering innovative products at affordable prices and by leveraging social media platforms to reach younger consumers. These companies often operate with greater flexibility than larger corporations and can move quickly when new trends emerge, which allows them to capture market share in fast growing segments. Consumer preferences in the beauty industry are also changing rapidly, which increases competitive pressure. Many consumers are increasingly looking for products that emphasize natural ingredients, sustainability, and health-conscious formulations. Others are interested in personalized beauty solutions, digital beauty tools, and connected devices. Companies that can anticipate these trends early and launch successful products often gain an advantage. If L’Oréal were to fail to respond quickly enough to these changes, it could lose relevance with consumers and risk losing market share to competitors that better match evolving preferences. Competition is particularly intense in China, which has become one of the most important beauty markets in the world. In recent years, domestic Chinese beauty brands have become more sophisticated and increasingly popular among local consumers. These companies often have a deep understanding of local trends, faster product development cycles, and strong digital marketing capabilities on Chinese platforms. As a result, some of L’Oréal’s brands, particularly within the Consumer Products division, have faced challenges maintaining market share in this market.

Product safety and recalls are a risk for L'Oréal because the company sells millions of cosmetic and skincare products every day, and consumer trust is essential in the beauty industry. Customers apply these products directly to their skin, hair, and face, which means that even small safety concerns can quickly damage a brand’s reputation and lead to regulatory scrutiny. A recent example occurred in March 2025 when L’Oréal recalled all U.S. batches of La Roche-Posay Effaclar Duo acne treatment after concerns that it could contain benzene, a chemical linked to cancer. Benzene can sometimes form when benzoyl peroxide, a common acne treatment ingredient, breaks down under heat or sunlight. Although L’Oréal’s own testing detected only small traces in one batch, the company decided to remove the product from shelves as a precaution after an independent laboratory reported elevated benzene levels in several acne treatments across the industry. Even when recalls are precautionary, they can still create negative headlines and raise concerns among consumers. Another example occurred in Europe in 2023 when regulators banned the fragrance ingredient lilial due to concerns about potential effects on reproductive health. Authorities in Portugal ordered companies, including L’Oréal, to stop selling products that still contained this ingredient and to remove them from stores. Situations like this illustrate how quickly regulatory standards can change and how companies must constantly adapt their formulations to remain compliant. Product safety issues can have several consequences for L’Oréal. First, they can damage consumer trust. Beauty brands rely heavily on their reputation for quality and safety, and if consumers begin to question whether products are safe, they may switch to competing brands. This is particularly important for skincare and dermatological brands such as La Roche-Posay and CeraVe, where consumers often expect a high level of scientific credibility. Second, product recalls can create financial costs. Removing products from shelves, replacing inventory, and reformulating products can all be expensive. In some cases, companies may also face legal claims or regulatory penalties if authorities determine that safety standards were not met. Third, evolving safety regulations can require companies to reformulate products or replace certain ingredients. These changes can increase development costs and disrupt production, especially when ingredients that have been widely used for many years suddenly become restricted. Because L’Oréal operates globally, it must comply with different safety regulations in many regions, including the United States, Europe, and Asia. This adds complexity and increases the risk that a product approved in one market may later face regulatory challenges in another.

Reasons to invest

Several favorable trends is a reason to invest in L'Oréal because the global beauty industry is supported by long-term structural drivers that are expected to increase demand for beauty products for many years. These trends include demographic changes, increasing interest in skincare and health, and evolving beauty habits among younger generations. Generational shifts represent an important driver of demand. Younger consumers are entering the beauty market earlier than previous generations, largely driven by social media and the widespread discussion of skincare routines online. Gen Z is already a major consumer group and will continue to grow in purchasing power as more consumers in this generation enter their late twenties and early thirties, a stage of life where spending on beauty products typically increases. L’Oréal actively targets these younger consumers through digital engagement, influencer partnerships, and product innovations tailored to their needs. Another favorable trend is the growing focus on health, skin quality, and longevity. Consumers are increasingly interested in maintaining healthy skin over the long term rather than simply addressing aging later in life. This shift toward preventive skincare is expanding demand for advanced skincare products and dermatological solutions. Brands such as La Roche-Posay and CeraVe are well positioned to benefit from this trend because they combine cosmetic products with dermatological credibility and scientific research. The aging population is another important growth driver for the beauty industry. By the end of the decade, the number of people aged 60 and above is expected to exceed one billion. Older consumers tend to spend more on skincare, particularly on products that focus on skin quality and anti-aging solutions. Because L’Oréal has a strong presence in premium skincare through brands such as Lancôme, the company is well positioned to capture demand from this demographic group. At the same time, beauty routines are becoming more sophisticated. Consumers today often use multiple products as part of daily skincare or haircare routines, such as serums, oils, masks, and specialized treatments. Social media has played a major role in encouraging consumers to experiment with new products and build more complete beauty routines. This trend increases the number of products consumers purchase and supports overall industry growth. The men’s grooming market also represents a significant opportunity. While men account for a substantial share of global beauty product usage, products specifically designed for men still represent a relatively small portion of the overall market. As grooming routines among men become more common, demand for products such as fragrances, skincare, and haircare is expected to grow. L’Oréal has already seen strong success with fragrance launches such as Yves Saint Laurent MYSLF and fragrances from Valentino Beauty. Another favorable trend is the strong growth of fragrances globally. Younger consumers are increasingly entering the fragrance category and often purchase multiple scents for different occasions. This trend, sometimes described as the “fragrance wardrobe,” has supported strong growth in the luxury fragrance market. L’Oréal holds leading positions in luxury fragrances through brands such as Armani Beauty, Prada Beauty, and Yves Saint Laurent, which positions the company well to benefit from this continued growth.

Emerging markets are a reason to invest in L'Oréal because they represent one of the largest long-term growth opportunities for the global beauty industry. These regions contain a vast and rapidly expanding consumer base, many of whom are entering the beauty category for the first time. Management estimates that emerging markets already contain around two billion potential beauty consumers, with another 500 million expected to be added in the next five years. As these consumers become more affluent, digitally connected, and increasingly interested in beauty products, demand for cosmetics, skincare, haircare, and fragrances is expected to grow significantly. One of the key attractions of emerging markets is the relatively low penetration of beauty products compared with developed countries. Many consumers in these regions are still early in their beauty journey, which means there is significant room for growth as they begin adopting skincare routines, fragrances, and haircare products. Management has highlighted that the company’s penetration in these markets is only around 25%, which means there is substantial potential to recruit new consumers over time. Emerging markets are already an important growth driver for L’Oréal. While they currently account for about 17% of total sales, they contribute roughly 40% of the company’s overall growth. Regions such as Latin America, the Gulf countries, Southeast Asia, and parts of Africa have delivered particularly strong growth. For example, countries such as Mexico, Brazil, Vietnam, and several Gulf countries have all experienced strong demand for beauty products in recent years. The company has adapted its product strategy to meet the needs of these markets. L’Oréal often introduces products that combine strong performance with accessible price points, making them attractive to new consumers entering the beauty category. At the same time, as consumers become more affluent, many gradually trade up to more premium products within the company’s portfolio. Emerging markets also provide opportunities across multiple beauty categories. In some regions, haircare and hair color are major entry points for consumers, while in others skincare and fragrances are growing quickly. For example, dermatological skincare is still underrepresented in many emerging markets compared with developed countries, which suggests significant long-term growth potential for brands such as La Roche-Posay. Luxury beauty is also expanding in some markets as consumer confidence and purchasing power increase.

Acquisitions and partnerships are a reason to invest in L'Oréal because the company has a long history of identifying promising beauty brands early and then accelerating their growth using its global capabilities. Instead of primarily acquiring already mature brands, L’Oréal often targets brands with strong potential and then uses its global distribution network, marketing expertise, and research capabilities to scale them internationally while preserving their identity. A good example of this strategy is Kiehl's. When L’Oréal acquired the brand in 2000, it generated around $40 million in annual sales. By 2016, the brand had surpassed $1 billion in revenue. Another example is CeraVe, which has become one of the fastest-growing skincare brands in the world since L’Oréal acquired it. Sales have grown to more than €2 billion, roughly fourteen times higher than when it was first acquired. These examples illustrate how L’Oréal can take relatively small brands and transform them into global leaders by expanding their distribution, increasing marketing support, and investing in innovation. More recent acquisitions follow the same strategy. In 2023, L’Oréal acquired Aesop, a premium skincare brand known for its strong brand identity and loyal customer base. Management believes the brand has the potential to become another billion-euro brand as it expands into new product categories and reaches more international markets. Similarly, the acquisition of Color Wow strengthens L’Oréal’s position in premium hair styling, a fast-growing segment driven by social media and increasing consumer interest in advanced haircare routines. In skincare, the company has also expanded its portfolio with brands such as Medik8 and Dr. G. These brands focus on science-based skincare and have shown strong growth, reflecting the growing demand for high-performance skincare products. L’Oréal plans to expand these brands globally, using its existing distribution network to introduce them to new markets. Partnerships with major luxury fashion houses also play an important role in L’Oréal’s strategy. Through agreements with brands such as Prada, Valentino, and Armani, L’Oréal develops and markets fragrances and beauty products that leverage the global recognition of these fashion brands. This strategy has been highly successful, with several of these brands growing rapidly in the luxury fragrance market. The company has also expanded its presence in high-end fragrances through its partnership with Kering to develop beauty lines for fashion brands such as Bottega Veneta and Balenciaga. At the same time, L’Oréal will take over the fragrance brand Creed, which is already one of the leading brands in the fast-growing collection fragrance segment. Management believes Creed has the potential to become a billion-euro brand as it expands globally. Beyond acquisitions, L’Oréal also takes minority stakes in companies to gain exposure to new areas of the beauty market. For example, the company has invested in Galderma to gain insight into the rapidly growing aesthetics market. These partnerships allow L’Oréal to better understand emerging trends and potentially expand into adjacent areas of beauty and skin health.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 11,44, which is from 2025. I have selected a projected future EPS growth rate of 11%. Finbox expects EPS to grow by 10,6% in the next five years. Additionally, I have selected a projected future P/E ratio of 22, which is twice the growth rate. This decision is based on L'Oréal's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be €176,64. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy L'Oréal at a price of €88,32 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 8.657, and capital expenditures were 1.495. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 1.047 in our calculations. The tax provision was 2.363. We have 533,2 outstanding shares. Hence, the calculation will be as follows: (8.657 – 1.047 + 2.363) / 533,2 x 10 = €187,04 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With L'Oréal's Free Cash Flow Per Share at €13,43 and a growth rate of 11%, if you want to recoup your investment in 8 years, the Payback Time price is €176,79.

Conclusion

I believe that L'Oréal is an intriguing company with strong management. It has built its moat through its powerful brands, extensive price ladder, scientific expertise, global distribution network, and deep understanding of consumer behavior. The company has consistently achieved a high ROIC, which is a trend that is expected to continue in the future, while free cash flow is also expected to grow over time. Travel retail is a risk for L'Oréal because a portion of its luxury beauty sales depends on duty-free channels in Asia, which can be highly volatile. Changes in regulations, travel patterns, or cross-border shopping activity, such as China’s crackdown on Daigou resellers, can quickly reduce demand in these channels and negatively affect sales. Competition is also a risk for L'Oréal because the beauty industry is highly competitive, with strong global rivals such as LVMH, Estée Lauder, Procter & Gamble, and Unilever competing across the same categories and channels. At the same time, fast growing independent brands and local players, especially in China, can quickly capture market share by responding faster to changing consumer trends. Product safety and recalls are another risk because consumers apply these products directly to their skin and hair, making trust and safety critical to the company’s reputation. Any safety concerns, recalls, or regulatory changes could damage consumer confidence, lead to negative publicity, and result in financial costs from product withdrawals or reformulations. Several favorable trends support the investment case because long term shifts such as younger consumers entering the beauty market earlier, increasing interest in skincare and longevity, and more sophisticated beauty routines are driving sustained growth in the industry. At the same time, expanding categories such as fragrances and men’s grooming create additional opportunities for L’Oréal to grow its sales. Emerging markets also represent an important opportunity because they contain a large and growing pool of new beauty consumers with relatively low product penetration today. As incomes rise and more consumers adopt skincare, haircare, and fragrance routines, these regions are expected to remain a major long term growth driver for the company. Acquisitions and partnerships further strengthen the investment case because L’Oréal has a strong track record of acquiring promising beauty brands and scaling them globally using its marketing expertise, research capabilities, and distribution network. This strategy allows the company to continuously strengthen its portfolio and expand into new high growth segments of the beauty industry. I believe L'Oréal is the best company in its sector, and buying shares at €336, which represents about a 10% discount to the intrinsic value based on the Ten Cap price, would be a good long term investment.

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