Investing.com-- L’Oréal (EPA:OREP) has received an upgraded rating from RBC Capital Markets, with analysts raising their recommendation to "outperform" from "sector perform," in a note dated Friday.
This change comes as RBC identifies stronger growth potential within the beauty market, particularly in hair and skin care, alongside a renewed push in innovation and product launches that could drive L’Oréal back to industry-leading growth rates.
Over the past year, L’Oréal’s stock has underperformed the broader European consumer staples sector by 20%, reflecting market skepticism about the company’s long-term trajectory.
Recent earnings reports have fallen short of expectations, and innovation has been more subdued compared to previous years.
However, RBC analysts argue that this underperformance is temporary. "We do not view a return to its historical average growth of +6% as an excessive ask and view lowered longer-term growth expectations as unjustified," they said, pointing to a recovery in the beauty market and L’Oréal’s strong positioning across its categories.
L’Oréal’s market leadership remains a key asset. "Over 60% of L’Oréal’s revenue is generated from businesses where it is the clear market leader," analysts flagged.
The company dominates hair care, where it is twice the size of its nearest competitor.
Luxury fragrance remains the only category where it does not have a clear leadership position, competing with Estée Lauder, Coty (NYSE:COTY), and LVMH. RBC sees strong potential for L’Oréal to maintain its industry-leading status.
The upgrade comes with a price target increase to €420 from €390. RBC also raised long-term growth estimates while lowering projected capital expenditures as a percentage of revenue.
"Trading at its 5-year trough (FY26e P/E of 25.5x), we view its risk/reward profile as attractive," the analysts noted, suggesting the stock remains undervalued relative to its potential.
Short-term headwinds persist, particularly in North America and China. RBC expects sluggish first-quarter growth, forecasting flat organic revenue growth.
The luxury segment, which accounts for about 30% of L’Oréal’s U.S. revenue, is seen as especially vulnerable to market pressures.
Despite these near-term challenges, RBC is confident in a second-half recovery, driven by an accelerated pipeline of product innovations under the company’s "Beauty Stimulus" plan.
"We observe significantly more product launches planned for 2025 than in the last few years…..we believe it points to the company’s increased focus on innovation and more proactivity in reinvigorating growth," analysts stated. Increased R&D investment supports L’Oréal’s efforts to reignite growth.
Expanding market share in emerging regions and e-commerce is expected to further boost performance.
The recent launch of CeraVe in India exemplifies the company’s push into high-growth markets.
Additionally, RBC sees opportunities in North America outside of luxury, particularly in professional hair care and consumer skin care, where L’Oréal has been expanding its salon portfolio and introducing lower-priced products for value-conscious buyers.