L’Oréal downgraded by Jefferies, PT cut to €340 as growth outlook weakens

Investing.com -- L’Oréal (EPA:OREP) shares face fresh pressure after Jefferies cut its rating on the French beauty group to “underperform” from “hold” and lowered its price target to €340 from €371, warning that growth and profitability are unlikely to match lofty expectations, in a note dated Tuesday. 

The brokerage’s target implies an 11% downside from the stock’s last closing price of €381.05, which values the company at €204.2 billion.

Jefferies analysts said the current valuation, about 29 times next-twelve-month earnings and a 3.4% free cash flow to equity yield, requires organic sales growth above 5% and steady margin gains.

“Those dynamics feel unlikely now,” the analysts said, citing a return of the global beauty industry to its historic 4% annual growth pace after the China-led boom years.

The downgrade rests on three pressure points. First, pricing power appears to have faded. L’Oréal stopped reporting standalone price contributions in the first half of 2025, grouping them with mix effects instead. 

Jefferies calculated that developed markets showed flat pricing year over year and noted a 10-basis-point decline in gross margin. 

“That suggests winning in the markets is more challenging,” the analysts said. High exposure to prestige skin care and derma products, once key drivers of outperformance, has also become a drag as category sales stalled.

Second, margins are expected to evolve with less quality than before. The brokerage noted that L’Oréal historically enjoyed a “virtuous cycle” of rising gross margins, increasing advertising and promotion spend, and leverage on selling, general and administrative costs. 

But analysts now forecast less gross margin support and slower reinvestment. “Op margin can still progress, but the quality of that progress will be less impressive & less supportive of valuation, we think,” the brokerage said.

Third, balance sheet flexibility is not expected to deliver near-term upside. L’Oréal holds a 10% stake in Galderma and has room to buy back shares from Nestlé, which still owns about 20% of the group, but Jefferies said such moves would not materially lift the stock in the short run.

The firm trimmed its 2027 earnings estimate by 3%, leaving it about 5% below consensus, and sees sales growth slowing to 4.4% in 2027 compared with market expectations of 5.7%. Operating margin is forecast at 20.4% in 2027 versus consensus at 20.7%. 

The analysts expect the company’s price-to-earnings multiple to contract to about 24 times over the coming year, while free cash flow yield rises to 3.9%, still below peers Nestlé and Unilever at about 4.5%.

L’Oréal’s revenue is projected to grow from €43.5 billion in 2024 to €48.1 billion in 2027, with organic sales growth moderating from 5.1% in 2024 to 4.4% in 2027. Jefferies cut its dividend per share forecast for 2027 to €8.40, down from €8.64.

“But any break down in this cycle now will think will weigh on the valuation over the coming quarters,” the brokerage said.