By Renée Schultes
L'Oréal is growing into a stock for all seasons.
When stock markets were in free fall in 2008-2009, the French cosmetics company's defensive qualities meant it suffered smaller losses. But as the recovery has gathered momentum, L'Oréal has continued to outperform. The company's shares have outperformed the CAC-40 index over both one and five years.
L'Oréal products have broad appeal. In a downturn, consumers in developed markets still spend on small-ticket luxury items. But the company also is benefiting from secular trends, such as urbanization and the expanding middle class in emerging markets, which account for over one-third of sales. Chief Executive Jean-Paul Agon 's ambition is to add one billion customers within five years.
True, L'Oréal had a poor crisis. Sales dropped 1.1% in 2009 and net profit fell 8%. At times, it looked like L'Oréal was losing its way. Since then, Mr. Agon has refocused the company on big innovations, new categories, and high levels of advertising and promotion spending.
His efforts are paying off. Cost controls and a 6.4% rebound in sales produced 17.3% operating margins, a first-half record.
But at L'Oréal's size, almost six times Estée Lauder, sales growth is heavily dependent on coming up with new products, rather than acquisitions. That means it needs more innovations. Last year, L'Oréal spent more than €600 million ($759 million) on research and development and filed 674 patents.
L'Oréal's dual appeal doesn't come cheap. Its stock trades at 18 times 2011 consensus earnings, just under Estée Lauder at 18.6 times and Beiersdorf /zigman2/quotes/210479173/delayed DE:BEI -0.62% at 18.3 times.
But in a world where investors are split on growth forecasts, L'Oréal's knack for reinventing inexpensive products suggests it should continue to do well.