L'Oreal's Powdered Up

L'Oreal's new CEO Jean-Paul Agon reckons the significance of the company's first-half results is limited.

But with L'Oreal's share price jumping Thursday to its highest level since May 2002, investors clearly beg to differ. After three lean years by L'Oreal's high standards, the cosmetics company is back in rude health.

Investors have underestimated quite how favorable a strong U.S. economy, buoyant global economic growth, revived consumer spending in the more sluggish OECD economies, and the unquenchable thirst among consumers in the developing world for Western goodies are for L'Oreal.

With such a strong following wind, L'Oreal has been able to fine-tune its product mix, push through price increases, and ease up a touch on promotional spending. Its R&D effort is paying off with strong demand for its new range of active skincare products, like wrinkle and cellulite treatments.

The upshot is that despite customers running down some inventory - L'Oreal says that was a feature particularly in the U.S. in the first half - and high raw material prices, L'Oreal chalked up a 23% rise in operating profit.

That was on a 5.8% increase, like-for-like, in sales, as its gross operating margin expanded 1.7 points to a heady 71.5%. R&D, and advertising and promotional spending slipped a touch as percentages of sales.

However, as has happened in the past, this all means L'Oreal stock is back in expensive territory, trading at 27 times estimated 2007 earnings, and at a premium to nearest listed peers - from Avon to Beiersdorf, Christian Dior, Colgate-Palmolive, Estee Lauder and P&G.

As Agon would no doubt say, L'Oreal is worth it. Whether the stock is worth much more is more open to question.

L'Oreal's strong interim showing came off a weak first half of 2005. The company retains a 10% stake in patent-pressured drug-maker Sanofi-Aventis which L'Oreal might be better off disposing with.

Making a success of the Body Shop acquisition, consolidated from July 1, and the prospect of more sluggish-than-expected consumer spending in the U.S. and Western Europe in 2007, should keep investors' enthusiasm in check despite L'Oreal's strong operating performance.

Source: Business Intelligence