M6 BARRON’S September 16, 2019
EuropeanTrader
L’Oréal Tries to Fix Blemish
ByRupertSteiner
FRENCH COSMETICS GIANTL’ORÉALHAD A RARE MISSTEP IN JULY AFTER MISSING
consensussales-growthforecastsforthesecondquarter,butitsfundamentals
remain solid, and it’s a strong long-term bet.
The world’s biggest beauty firm last week took steps to boost sales growth
after demand slowed for makeup in the U.S., including changing its top exec-
utive there. L’Oréal CEO Jean-Paul Agon toldBarron’sthat the growth in
makeup would ‘‘reaccelerate’’ with new products and repositioning of brands.
“We are doing everything to restimulate the market,” he says about the U.S.
Over the past five years, the maker of Maybelline, Garnier, and Lancôme
has been a stock market star, and strong growth in sales and profit helped
lift the shares 96.2%, compared with a 53% rise in the Dow Jones Industrial
Average.
InJuly,thestock(ticker:OR:France)posteda12.1%riseinhalf-yearoper-
atingprofitto2.8billioneuros($3.1billion)onthebackofa10.6%increasein
reportedsalesto€14.8billion.Theshareslost4.1%onthedayduetomissing
some forecasts, and have rebounded since to about €251.
Despitethestockfetchingahefty31timesthisyear’sexpectedearnings,
brokerMainfirstrateditOutperforminanAugustnote,witha€270pricetar-
get,7.5%aheadoftherecentclose.MainfirstanalystMarionBoucheronwrote
that L’Oréal should continue to grow about twice as fast as most home- and
personal-care players.
Sheforecastsa33%increaseinearningsbeforeinterestandtaxesmargin,
whichdoesn’tincludeexceptionalcosts,to€6.4billionby2021.BrokerLiberum
estimatesa29%riseto€6.2billionofEbit,butonanadjustedbasis,duetobet-
termarginsfrominnovations,andsavingsfromtheefficientuseofdigitalad-
vertising.
L’Oréal was foundedin 1909 by Eugene Schueller, a
FrenchchemistofGermandescent,andwentpublicin1963.
It has a market value of €141.9 billion and is geographically
spreadoutover130countrieswith86,000employees.Ithasa12%shareofthe
€175billionmarketandproducesawiderangeofbrandedskincare(31.8%of
sales),makeup(27.4%),haircareandcolorants(27.1%),andperfumes(9.3%),
which are sold via four major divisions.
Eachdivision—professionalproducts,consumerproducts,L’OréalLuxe(up-
scalecosmeticsandfragrances),andActiveCosmetics(skin-careandbeauty
productssoldinhealth-careoutlets)—targetsadifferentchannel.Thelargest
division, consumer products (44.1% of sales), focuses on the mass market.
Last week, Agon appointed the boss of L’Oréal China, Stéphane
Rinderknech, as president and CEO of L’Oréal USA. “We really intend to
bounce back in the U.S., but it may take some time,” Agon says.
PierreTegner,ananalystatbrokerOddoBHF,saidthatwithnewmanage-
ment, “the group has given itself the means to change the trend in North
America.” But North America isn’t L’Oréal’s biggest market; it contributes
25.7%ofgroupsales.Theleaderis“newmarkets”includingAsia-Pacific,con-
tributing 45.9% of group sales, and western Europe, at 28.4%.
L’Oréallookstocapitalizeondemandforskin-careproductsandgrowthin
e-commerce, especially in China. “We are perfectly on plan for this year for
the group,’’ Agon says. “This first half is one of the best we have ever had.’’
IfAgonisabletofixtheblemishonitsU.S.business,thestockwillcontinue
its stellar growth.
European
Markets,
pageM23
EmergingMarkets
Bonds Set to Take a Breather
ByCraigMellow
WHERE IN THE WORLD CAN YOU GET A DECENT INTEREST RATE ON GOVERNMENT
bonds? Most places, actually, that aren’t the U.S., Europe, or Japan.
Investors in emerging market sovereigns have been richly rewarded this
year,evenrelativetoothersectorsofasurgingfixed-incomemarket.Yields,
which run inversely to prices, have plunged faster than U.S. Treasury debt,
tighteningtheaveragespreadondollar-denominatedemergingmarketbonds
by90basispoints,or0.9%,saysEricBaurmeister,headofemergingmarkets
debtatMorganStanleyInvestmentManagement.That’sspurredatotalreturn
near 14% for theiShares JP Morgan USD Emerging Markets Bondex-
change-tradedfund(ticker:EMB),comparedto11.5%forU.S.highyield,an
asset class with which it competes for capital.
If you didn’t jump on the rally already, you probably missed it. “I’m not
overlyoptimisticthatwe’llhavethesamekindofspreadtighteninggoingfor-
ward,”Baurmeistersays.“Themajorityofthismoneyhasalreadybeenmade.”
Theoverridingfactofbond-marketlifethisyearhasbeentheFederalRe-
serve’sJanuaryU-turntowardloweringrates.Thatsetoffaglobalscramble
forbondsatcurrentinterestrates.U.S.junkmightlooklikethebigwinner:
Yieldshavedroppedfasterthanonemerging-marketpaper,andremainhigher,
saysGaryPzegeo,headoffixedincomeatCIBCPrivateWealthManagement.
TheaverageyieldtomaturityontheiSharesiBoxx$HighYieldCorporate
Bondfund (HYG) is 5.2%, compared to 4.7% for the emerging market ETF.
Butemergingmarketshavehadanaceintheholeintheformofduration:
12yearsinsteadof3.5.Roughlyspeaking,bondpricesarecalculatedbyyield
compressiontimesthenumberofyearsaholdercanexpecttobenefitfromthat
change.Nowthatrateslooktobelevelingout,advantageshiftstothebetter-
payingjunkbonds,Pzegeofigures.“Inanenvironmentwhererateshavestabi-
lized, I would rather clip the coupon,” he says.
Emergingmarketspecialistsarehuntingoffthebeatentracktokeepthe
outsizebondreturnsrolling.ShamailaKhan,directorofemergingmarketdebt
at AllianceBernstein, likes Nigeria, Egypt, Costa Rica, and the deeply dis-
counteddebtonofferfromArgentina.“EMhighyieldstilllooksveryattractive
onarelativebasistoU.S.highyield,”shesays.“Thespreadisinthetop10%
of its historic average.”
TimJagger,headofemergingmarketsdebtatColumbiaThreadneedle,also
believes Ukraine, where actor-turned-president Volodymyr Zelensky shows
promise on reform and the latest Eurobond issue paid 6.75% for seven-year
money. Jagger also likes Pemex, the ailing but state-supported Mexican oil
companywhosedebtyieldsmorethan6%,evenaftera$5billioncashinjection
from the government on Sept. 11.
“For our investors, emerging market bonds are not a strategic asset,”
CIBC’sPzegeosays.Thatcouldchangeasreturnsfromotherbondsstaylower
forlonger.Theassetclass’s50basis-point-yieldlagfromU.S.junkisoffsetby
considerablylowerrisk.Halftheemergingmarketdollarbondindexisinvest-
mentgrade.TheriskprofileisgettingbetterashaplessVenezuelahasbeen
bootedfromtheindexandSaudiArabia,Qatar,andUnitedArabEmiratesen-
ter.Investorsshruggedoffthe meltdowninArgentinaasmoreestablishedbor-
rowers like Brazil and Mexico maintain or improve fiscal discipline.
“There are some good stories out there, which is why spreads have come
in,” Baurmeister says.
Just expect a breather before they do better.