L'Oreal - The beauty of premium growth at sector-relative lows; onto CL-Buy
L’Oreal has underperformed the sector by 6% over three months and trades at a 10-year sector-relative low (NTM P/E), ahead of a year in which we see: (1) top-line growth acceleration (driven by the US/China); (2) better margin expansion as FX headwinds unwind, A&P falls and SG&A stabilises; and (3) EPS accretion from use of cash (as per French law, the second anniversary of the share buyback from Nestle allows for further transactions). We do not believe L’Oreal’s sector EPS growth premium is adequately valued by the market, and show its sector-relative LFL growth is within its historical range, contrary to common belief that its growth premium has eroded sharply.
Beiersdorf - Removed from Pan-Europe Sell List
We upgrade Beiersdorf to Neutral (from Sell) following a recent pullback in shares (down 8% over the past month). Beiersdorf’s sector relative premium has come back within its historical range (to 30%) and below its 10-year average (45%). Like the consumer staples sector, Beiersdorf outperformed the market in 2015 as investors sought stability. Since being added to the Sell list on Dec. 2, 2014, the shares are up 11.2% vs. the FTSE World Europe -1.7% (+19% and +3% over the past 12 months). However, Beiersdorf has lagged the consume staples sector (by 2% over the past 12 months and 3% since Dec. 2), on disappointing 1H15 topline growth.