L’Oreal stock (OTCMKTS: LRLCY) is up 7% since the beginning of this year and, at the current multi-year high of around $64 per share, we believe L’Oreal stock has a significant downside.
Why is that? Our belief stems from the fact that L’Oreal’s stock remains about 44% higher than the low seen in early 2018. Our dashboard What Factors Drove 44% Change In L’Oreal Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.
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This rise over the past 2 years was helped by a 7% rise in L’Oreal’s revenues. However, net income decreased by around 8% as operating expenses rose at a rate faster than that of revenue growth. This combined with a 5% drop in outstanding share count led to a meager 2% drop in earnings on a per share basis.
Finally, L’Oreal’s P/E ratio rose from 29x at the end of 2017 to 40x at the end of 2019. While L’Oreal’s P/E has risen to 43x currently, given the volatility of the current situation, there is additional possible downside for L’Oreal’s multiple when compared to levels seen in the past years – P/E of 29x at the end of 2017 and 2018.
So what’s the likely trigger and timing to this downside?
The global spread of Coronavirus and the resulting lock downs has meant there is much lower demand for cosmetic products such as makeup and fragrances, as people are just not stepping out as much as they used to. This will lead to a lower demand for L’Oreal’s products in these segments, but skin care and hair care demand should remain unaffected.
In addition, there have likely been supply disruptions in China and elsewhere from the global Coronavirus crisis. We believe L’Oreal’s Q2 results in August will confirm the hit to its revenue. It is also likely to accompany a lower Q3 as-well-as 2020 guidance.
Regardless, if there isn’t clear evidence of containment of the virus at the time of the earnings announcement, we believe the stock will see its P/E decline from the current level of 43x to around 36x, which combined with a slight reduction in revenues and margins could result in the stock price shrinking to as low as $50.
While L’Oreal stock doesn’t seem to have much near term upside, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That Could Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.
Our dashboard forecasting U.S. Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture.
The complete set of coronavirus impact and timing analyses is available here.