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Beauty is certainly in the eye of the Credit Risk beholder.

Date: March 30, 2014 Author: Ramzi Watfa
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According to the company’s website L’Oreal Group is the world’s largest cosmetics and beauty company with a portfolio of 27 international brands including Lancôme, Maybelline, and Redken. With an organizational structure based on distribution channels and a strong sales force, it aims to please customers by helping millions of people around the world feel beautiful every day. I don’t know about customers, it certainly pleases its bankers from a credit risk perspective.


With Euro 22.5bn in sales, it seems the beauty business has no end. The well-known cosmetics company has a remarkable historical performance with a financial rating of 1.95 using 6 Sigma’s Credit Risk System. Although it is vulnerable to changes in its circumstances which leads to an increase in its financial rating to 3.92, it is an investment grade par excellence.

Certainly no issues with generating cash flow:

  1. Sales CAGR was 6% since 2005, with a nice spurt in 2012 of 10% exceeding €22Bn. This is a mature and very competitive business, and to continue growing, the company is focusing on emerging markets in Africa, Middle East, and China. In November 2012 it inaugurated the largest factory in Indonesia, with a total investment of EUR 1.6Bn. Quite an achievement
  2. Irrespective, the company managed to maintain a constant EBITDA margin of 20% over the 2010-2012 period. This provided it with healthy tolerance of 73 days.
  3. What’s more remarkable is the consistent negative Cash Cycle for past five years. This is a company that does not need short-term financing: it collects before it pays.
  4. As a result, a cash beauty in this case, with NOCF increasing steadily to EUR 4.4 Bn in 2012, or 20% of sales. In other words for every 1 EUR it sells, it generates 20 cents in cash.
  5. The company lives well within its means with an insignificant bank debt and with all DSCRs above 100%.

A Category 1 obligor with a potential share of wallet of 70% and a Tenor up to 12 years. With 20% volatility in its NOCF, it has the capacity to borrow up to Euro 20bn with ease over a ten year period.

So why would a very rich company such as this pay so little to its shareholders at 5% of equity. Seems it was saving itself to buy-back 8% of its shares from Nestle for 6Bn Euro. Does this explain why its share price reduce from Euro 136 in June 2013 to Euro 120 in March 2014?

If this company succeeds in penetrating the growing and affluent Chinese market, whilst maintaining the same cash dynamics that it has exhibited in the past, then its cash generating ability is most likely to continue to improve in future; and surely its share price is undervalued.

What would be your cross sell opportunity for a company like this? Provide us with your views in Comments below.

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