Fabulous Fundamentals, at a Technical Crossroads

L’Oreal fell ~5% in trading today, following a minor miss on expected Q3 revenues (€5.94B vs FactSet €5.96B) and a downgrade by Raymond James. While management did note a very slight slowdown in a couple of markets (Hong Kong and Brazil) in its earnings call yesterday, we wonder if such a steep one day decline is warranted.

After all, out of the four DM EMEA Personal Product companies, L’Oreal has consistently generated some of the most successful growth over the last 3-, 5-, and 20-years.

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These results are not too surprising when we take into account that companies consistently investing in knowledge (aka Knowledge Leaders) tend to outperform over time. With the highest knowledge intensity of the group–investing 3.4% of sales in R&D activities and another 15.2% of sales in advertising and firm-specific resources–L’Oreal is certainly a leader in its industry.

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Over time, this commitment to investment in intangibles has lead to Intellectual Property accounting for more than 20% of Assets on L’Oreal’s balance sheet.

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In fact, by properly accounting for these investments, the level of the company’s total assets jumps to nearly $50bn from an un-adjusted level of less than $40bn.

Actual

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Intangible-Adjusted

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With the highest gross margins in the group (more than 70%) and the best operating and free cash flow margins, L’Oreal’s positive stock price performance certainly does not seem out of place–even if the valuations remain elevated.

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While today’s decline will generate a reversal (a descending column of o’s) on our point-and-figure chart, we are not yet convinced the uptrend that began around D-2 is finished. It is not uncommon for historic resistance (in this case, at B) to test the strength or ability of an uptrend to continue. Only time will tell whether or not L’Oreal is worth it.

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