L’Oreal Hair Care and Skin Care – 50% of Stock Value

We recently launched the coverage of L’Oreal with a Trefis Price estimate of $22.70, slightly above the current market price. L’Oreal (PINK:LRLCY) is a leading player in the hair and skin care markets and competes with companies like Revlon (NYSE:REV), Avon (NYSE:AVP), Proctor & Gamble (NYSE:PG) and Estee Lauder (NYSE:EL).

L’Oreal is the largest manufacturer of cosmetics in the world. It manufactures and sells makeup, fragrances, skin care and hair care products through 27 global brands and caters to consumers across all income levels. L’Oreal’s distribution channels span mass volume retailers and e-commerce websites to upscale perfumeries, pharmacies, department stores, and company-owned stores across the globe.

We estimate the hair care products account for over 30% of L’Oreal’s stock while skin care products constitute 25% of the stock price.

Below, we highlight the differences in the value contributions of hair care and skin care product segments for L’Oreal, and examine the impact of market share on the company’s intrinsic stock value.

+30% of Value – Skin Care, the Largest and Fastest Growing Personal Care Segment

L’Oreal has a 13% share of the expanding Skin Care market, which is worth over $90 billion and growing at over 5% year-on-year by our estimates. We estimate that L’Oreal can gain market share through extended periods of promotions and increased research and development spending in the years ahead. The company is well-positioned to benefit from a pickup in consumer spending given its ability to reach a diversified consumer base through a variety of price points.

Should the company’s strategic efforts spur a 100 basis point increase in 2013 market share beyond our estimated about 13%, we estimate further upside potential of roughly 2%. The chart above examines the impact of shifts in L’Oreal’s Skin Care market share.

+20% of Value – 2nd Globally in Hair Care

L’Oreal has a 23% share in the hair care product segment, which is worth over $72 billion and growing at close to 2.6% year-on-year by our estimates. We project that the company can grow its hair care market share through strategic efforts and strong product positioning as described above. The chart above shows the price sensitivity of L’Oreal stock to forward shifts in its hair care market share.

We estimate additional upside of nearly 2% given a 100 basis point increase beyond our current 2013 estimate of 23.1%.

Both hair care and skin care segments have comparable EBITDA margins (a measure of profitability) of close to 20%. The difference in valuation is primarily attributable to separate market shares in products segments of different sizes and growing at markedly different rates. The relatively lower market share in skin care is compensated by the higher market size of skin care products along with close to double the growth rate of the skin care product segment, due to anti-aging skin care products and skin care focused on men.

You can view our complete analysis for L’Oreal here.