Investing.com -- L’Oreal SA (EPA:OREP) shares were downgraded to Equal Weight from Overweight by Morgan Stanley (NYSE:MS) analysts on Wednesday, alongside a price target cut to €379 from €394.
The personal care giant’s stock fell over 1% in Paris trading.
While the beauty industry benefits from structural tailwinds, such as an aging population in developed markets, L’Oreal’s organic sales growth (OSG) for the fiscal years 2024 and 2025 is projected to be no higher than the broader staples sector.
Yet, the stock “trades at a meaningful premium (albeit narrowed),” Morgan Stanley analysts led by Sarah Simon said.
Despite the company’s reputation for consistent margin expansion and a well-balanced business across categories and geographies, near-term top-line weakness and a lack of obvious upgrades led to the decision to downgrade.
Morgan Stanley’s updated estimates reflect the fiscal year 2024 results, with a slight adjustment in margin forecasts to 20.3% from 20.4%.
The sale of L’Oreal’s stake in Sanofi (EPA:SASY) (NASDAQ:SNY) has also been factored into the estimates, reducing the contribution from Sanofi dividends from fiscal year 2025 but offset by a higher proportion of cash on the balance sheet.
As a result, the firm’s earnings per share (EPS) projections for fiscal years 2025 and 2026 have increased by 2%.
In terms of valuation, Morgan Stanley’s discounted cash flow (DCF) analysis suggests a 12-month fair value for L’Oreal’s stock at around €440, based on an unchanged weighted average cost of capital (WACC) of 7.5% and a terminal growth rate of 3%.
The price-to-earnings (P/E) based valuation assumes L’Oreal can trade at a 50% premium to the staples sector, reflecting its superior free cash flow (FCF) conversion and potential medium-term relative OSG outperformance.
However, “it is this premium which remains under pressure given lower than average top line growth and where upside could come should L’Oreal’s OSG pick up beyond 5%,” analysts noted.
The firm’s mathematical average of both valuation approaches results in a price target of €379, suggesting an approximate 11% upside from the current share price.
Morgan Stanley has also revised its bull and bear case scenarios for L’Oreal’s stock, setting a new bull case price target of €472, down from €573, and a bear case target of €288, decreased from €305.