Down 25% This Year Is Estée Lauder A Better Pick Over L’Oréal?

Given its attractive valuation, we believe that Estée Lauder stock (NYSE: EL) is currently a better pick over its peer, L’Oréal stock (OTCMKTS: LRLCY). LRLCY stock trades at a higher valuation multiple of 5.7x revenues, versus 2.6x for EL stock. This gap in valuation can partly be attributed to L’Oréal’s superior revenue growth and profitability. There is more to the comparison, and in the sections below, we discuss why we think EL will outperform LRLCY in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation.

1. L’Oréal Stock Has Outperformed Estée Lauder In The Last Three Years

LRLCY stock has shown gains of 25% from levels of $75 in early January 2021 to around $95 now, vs. a sharp decline of 55% from levels of $265 to $115 for EL stock, over this period. This compares with an increase of about 45% for the S&P 500 over this roughly three-year period. However, the changes in these stocks have been far from consistent. Returns for LRLCY stock were 25% in 2021, -25% in 2022, and 40% in 2023, while that for EL stock were 39%, -33%, and -41%, respectively. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that LRLCY underperformed the S&P in 2021 and 2022 and EL underperformed the S&P in 2022 and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Consumer Staples sector including WMT, PG, and COST, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could LRLCY and EL face a similar situation as they did in 2022 and underperform the S&P over the next 12 months — or will they see a strong jump? While we think both stocks will likely see higher levels, EL will fare better between the two.

2. L’Oréal’s Revenue Growth Is Better

L’Oréal has seen its revenue rise at an average annual rate of 9.6% from $33.9 billion in 2020 to $44.6 billion in 2023. On the other hand, Estée Lauder saw its top line expand at an average rate of 4.4% from $14.3 billion to $15.9 billion over this period.

L’Oréal’s revenue growth has been driven by the increased fragrances and skin care products sales. While skin care saw a 65% rise in sales between 2020 and 2023, fragrance sales were up 60%. Lately, the company is seeing growth in both North America and Europe, driven by its mass market range and dermatological products.

Estée Lauder’s revenue growth is being led by travel recovery and opening up of economies post-pandemic. Within segments, its fragrance and hair care products have been the key growth drivers. While fragrance sales are up 60% between 2020 and 2023, hair care sales are up 26%. However, makeup sales are on a decline, falling 5% over the same period. The sales growth has slowed lately due to a weakening consumer spending environment and slower than anticipated pick up in Asia demand.

3. L’Oréal Is More Profitable 

L’Oréal’s EBITDA margin fell from 26.3% in 2020 to 24.3% in 2023, while Estée Lauder’s EBITDA margin expanded from 10% to 15.8% over this period. Estée Lauder decided to cut its workforce by 5% to lower its overall costs, and this should help the company expand its EBITDA margin going forward.

Looking at financial risk, both companies are comparable. Estée Lauder’s 24% debt as a percentage of equity is much higher than just 3.5% for L’Oréal. However, its 17.2% cash as a percentage of assets is higher than 8.3% for L’Oréal, implying that L’Oréal has a better debt position, but Estée Lauder has more cash cushion.

4. The Net of It All

We see that L’Oréal has seen better revenue growth, is more profitable, and has a better debt position, while Estée Lauder has more cash cushion. Now, looking at prospects, we believe Estée Lauder is the better choice of the two. We estimate Estée Lauder’s Valuation to be $155 per share, reflecting around 35% upside from its current levels of $115. At its current levels, EL stock trades at 2.7x trailing revenues, versus a 5.5x average over the last three years. In contrast, we estimate L’Oréal’s valuation to be $100, close to its current market price of $96. At its current levels, L’Oréal stock is trading at 5.7x revenues, versus 6.0x average over the last three years.

Overall, we think EL is likely to offer better returns than LRLCY in the next three years. We think a rebound in Asia travel as well as travel retail will likely result in robust growth for Estée Lauder in fiscal 2025 and beyond. This, clubbed with the company’s initiative of Profit Recovery Plan to boost margins, should bolster the overall earnings growth and drive its stock price higher. Although L’Oréal is doing well in key markets, we think its valuation takes into account the positives.

While EL may outperform LRLCY in the next three years, it is helpful to see how Estée Lauder’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 6/27/2024
[2] Cumulative total returns since the end of 2016

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