Innovation Will Drive L'Oreal Forward

Innovation Will Drive L'Oreal Forward

L'Oreal SA has experienced an uptrend in stock price since the bottom in 2009, with its share price rising from $11.80 per share to $33.70 per share. Moreover, L'Oreal has consistently increased its dividend every single year for the past quarter of a century, with annualized growth of 15%. Currently, it offers investors a decent dividend yield at 1.4%. Should investors consider L'Oreal a good investment opportunity at its current price? Let's take a closer look and find out.

Growing operating performance, driven by innovations
In the first half 2013, L'Oreal experienced decent sales growth of 6.4% on a currency-neutral basis, due to a 5.4% increase in like-for-like sales. Most of its operating profit, EUR 1.19 billion, or 58.2% of its total group operating profit in the first half of 2013, was generated from the consumer products segment.

L'Oreal has been one of the most dominant players in the consumer cosmetic industry, growing nearly twice as fast as the global market while enhancing its positions on all continents. Even in Western Europe, where the market trend has been negative, L'Oreal actually gained market share and enjoyed positive sales growth driven mainly by improvements in hair care, colorants, and skin care.

Moreover, L'Oreal also benefits from ongoing product innovations with its intensive investments in research. New innovations include the Advanced Hair Care range in the U.S., Total Repair Extreme in Western Europe, and Elseve Quera-Liso in Latin America. The company mentioned that L'Oreal Paris hair care was actually the largest factor behind the total group's growth in the first half of 2013.

Estee Lauder and Revlon also rely on innovation to drive their performance
Estee Lauder also gained meaningful market share in several markets, including Asia, China, and the U.K. and attracted new consumers to its brands by its global innovations. In order to enhance its operating performance, the company will focus on driving innovation rather than increasing its promotions in this current industry environment.

In the first quarter of fiscal 2014, the company had two big launches in its two biggest brands. They were Estee Lauder's Advanced Night Repair Eye Serum in the skin care category and Dramatically Different Moisturizing Lotion + under the Clinique brand. In fiscal 2013, the company reported that innovation and new products across all brands and regions reached 16% of its total revenue. Estee Lauder has been focusing on bigger initiatives with higher local relevance in its products.

Revlon has also relied on innovation, especially in the color authority segment, to drive its operating performance. Recently, it achieved some success in the lip category with ColorStay Ultimate Suede Lipstick, Super Lustrous Shine lipstick, and Super Lustrous lip-gloss. In addition, one of its new nail products, Revlon Nail Art, also recorded a positive performance. Although it continued to introduce new nail products in 2013, it does not expect these new launches will match the performance of its two biggest nail franchise relaunches last year, ColorStay Nail and Revlon Color Nail, as it has detected slowing growth in the nail business.

Among the three, L'Oreal pays the highest dividend yield at 1.40%, while Estee Lauder offers only a 1% dividend yield. Revlon does not pay any dividends to its shareholders at all. However, it seems to be quite richly valued at 16.7 times its EV/EBITDA (enterprise value/earnings before interest, taxes, depreciation and amortization). Estee Lauder is a bit cheaper with a 15.5 EBITDA multiple while Revlon is the cheapest, being valued at only 10 times EV/EBITDA.

My Foolish take
L'Oreal's business will definitely grow in the future because of its global leading position in the cosmetics industry and its growing performance driven by product innovation. However, because of L'Oreal's rich valuation, I would rather wait for a future price contraction before initiating a long position in this stock.

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Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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