Investing.com - Jefferies International analysts upgraded their rating on CAC 40 member L'Oréal (EPA:OREP) to "Hold" from "Underperform" in a note released on Wednesday.

The analysts highlighted that the normalization of the beauty market is underway, with expected growth now approaching the lower range of 4 to 4.5%, consistent with the long-term average, but well below the 5.5%+ observed since 2018.

They estimated that the 17% drop in L'Oréal's stock since the beginning of the year largely reflects this shift. However, they also note that the revaluation of multiples from nearly 34x to 28x now offers a more limited downside potential, hence the adjustment of their recommendation to "Hold."

Jefferies points out, however, that L'Oréal's medium-term organic growth expectations remain too high given the market normalization. Growth estimates for the second half of 2024 have been revised down from 8% after the first-quarter results to 6.6%, which Jefferies considers more realistic (their own estimate being 5.3%).

The report also mentions that the Travel Retail segment in Asia, which was a significant drag in the second half of 2023, could become a modest growth catalyst in the second half of 2024, provided current sales trends continue.

Taking into account the second-quarter results, Jefferies has adjusted its forecasts for the 2024 fiscal year, increasing the estimate for organic growth to 6.3% (from 5.6% previously), although earnings per share (EPS) forecasts have been reduced by 1.4% due to higher financial costs and the impact of exchange rates.

The price target has consequently been slightly revised to EUR 365, from EUR 362 previously, based on a target valuation ratio of 26x P/E (or 16.3x EV/EBITDA).

In summary, Jefferies sees fewer risks for L'Oréal's short-term estimates but remains cautious about medium-term growth expectations, with a limited growth potential for the coming years due to market conditions and increased competition in the sector.

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