Why Analysts May Be Wrong About L’Oréal

By Sergei Pliutsinski, Analyst | March 26, 2025

Is L’Oréal overvalued? Your answer to that might depend on where your investment focus lies—Europe, or the entire world.

L’Oréal, based in France, is the world’s largest maker of cosmetics, with about a 13% share of the global market. Some of the century-old company’s best years were just before the COVID-19 pandemic, as demand soared for luxury skincare products, particularly among young consumers in China. But growth in the beauty industry has slowed since the pandemic, and the main reason for that slowdown is China, where economic struggles have weighed on consumer spending. While nearly 30% of L’Oréal’s sales came from North Asia in 2021, that figure shrank to 24% last year.

L’Oréal also benefited from a subdued competitive environment during the pandemic. Virus-related disruptions resulted in fewer new brands entering the market, and its rivals held off on new product launches. These conditions enabled L’Oréal to increase its sales at 1.7 times the rate of the industry. Now, its growth is settling back to its pre-pandemic level of around 1.2–1.3 times the industry rate.

But global beauty sales are still expected to increase 4.5% this year, compared with a rate of 5% for the years leading up to the pandemic. And L’Oréal is still outpacing the industry—the company’s sales climbed 5.1% in 2024.

Shares of L’Oréal command a sizable premium over other European Consumer Staples stocks, and that gap has widened in recent quarters. For example, Bloomberg data show that L’Oréal’s forward price-to-earnings ratio is more than 50% higher than the average for European staples. Some analysts focused on the European sector thus view L’Oréal’s valuation as relatively expensive and have turned bearish on its stock.

However, that narrow lens is less relevant to a global investor. When you expand an analysis of L’Oréal’s valuation to include US companies, it starts to look more interesting.

For a long time, the average price-to-earnings ratios for US and European Consumer Staples stocks tended to trace each other—until the end of 2023, when their valuations began to diverge. US Consumer Staples are now much more expensive than their European counterparts.

Source: FactSet.

Consider now that the most significant contributors to the orange line above are companies focused on food and household products. Those are slower-growing markets that, unlike beauty, haven’t yet resumed their pre-pandemic pace.

Therefore, five years after the COVID-19 virus shut down the global economy, L’Oréal’s benchmark is looking worse, but its own business appears to be unchanged from before the pandemic. No wonder it trades at a premium.

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The Other Novo Doesn’t Need Ozempic

By Anix Vyas, CFA, Analyst and Portfolio Manager | March 12, 2025

At an industrial hub about an hour outside Copenhagen, engineered yeast cells are fermented to produce semaglutide, the key ingredient in Ozempic and Wegovy, the highly sought-after GLP-1 drugs made by pharmaceutical giant Novo Nordisk. Denmark has a long history as an important contributor to biomedical innovation, including the diabetes treatments for which Novo Nordisk is known. The company, one of the largest employers there, produces half the world’s insulin and was among the first to commercialize its use a hundred years ago.

But Novo Nordisk isn’t the only company in the neighborhood that uses the alchemy of fermentation science to turn microbes into high-demand products. It isn’t even the only Novo.

Just around the corner from the cauldrons of Ozempic is another facility, where three-story fermentation tanks are similarly filled with bacteria and fungi multiplying by the millions in a nutrient-rich broth. The enzymes that get secreted are eventually used by dozens of industries to make everything from food and laundry detergents to biofuel and medicines. The Novo that produces and sells these enzymes is Novonesis.

The similarity in the names isn’t a coincidence. That’s because, until 2000, the two Novos were one company. More than two decades after their corporate breakup, their headquarters, some labs, and production plants remain near one another (and both businesses continue to be controlled by a holding company for the Novo Nordisk Foundation).

“Novo” is Latin for new, and that’s what industrial enzymes were in the 1940s, when the original company introduced its first enzymatic products—one used to clean leather hides before they are tanned, and another for textile desizing, in which amylase breaks down starch agents to prepare fabrics for dyeing. The company was also a pioneer in synthetic biology, launching its first enzyme derived from genetically engineered microorganisms in 1987; lipase is still used today in detergents to help remove stains deposited by a greasy burger or pizza, and some of Novonesis’s biggest customers are Procter & Gamble and Unilever.

Enzymes are proteins that act as catalysts to speed up chemical reactions. For example, they are naturally found in the stomach and help break down food into tiny particles that can be converted into energy. In industrial settings, they are used as a substitute for harsh chemicals, which tend to require higher temperatures and pressure to carry out the necessary reactions. The use of enzymes also prevents unwanted reactions, as each type of enzyme binds only to specific molecules, thus leaving behind less waste than traditional chemicals that could give off hazardous byproducts. And industrial enzymes are a good business: While they comprise a small portion of a manufacturer’s overall cost of goods sold, the switching costs can be high, which gives enzyme suppliers pricing power over their customers. This is especially true for Novonesis, given that it is the dominant player in the oligopolistic niche market.

Another source of strength for Novonesis is its research-and-development strategy. The company has historically spent much more on R&D as a percentage of sales than competitors such as DuPont, DSM, and BASF, and that investment has produced a number of important products and thousands of patents over time. In 2024 alone, Novonesis introduced 45 new products, and 30% of its revenue comes from products launched in the past five years.

Novonesis recently acquired its Danish competitor, Chr. Hansen, which supplies bacteria cultures and probiotics used in products such as yogurts. (The US$12.3 billion deal closed last year.) There are product-level advantages to putting the companies together. For example, adding protein to yogurt changes the texture and taste, but Novonesis can now combine products to better address those issues. Management has said it sees similar synergistic opportunities around food preservation for baked goods.

Revenue growth had been bumpy for Novonesis over the past decade, but recently it has gained positive momentum. Pro-forma sales climbed 5% in 2024 (8% when excluding the negative effects of currencies and acquisitions), and the company projects organic sales growth of 5% to 8% this year. The long-term outlook also looks attractive because there remains a significant opportunity for enzymes to displace chemical additives in industrial production processes. The clearest example is detergents, as producers emphasize products that are more water efficient, enable washing machines to run at lower temperatures, and use fewer harsh chemicals. An expanding middle class in emerging markets could also increase the demand for better household-cleaning products.

It’s also at lower US tariff risk than some other European companies, given that Novonesis has R&D and production facilities in the US, and most of its demand there is fulfilled by local production.

It may not be one of the companies shaking up the splashy market for weight-loss solutions, but Novonesis happens to possess a lot of the traits that investors admire about its better-known sibling: cutting-edge research that allows it to succeed in high-growth markets. For Novonesis, that growth strategy is beginning to bear fruit.

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On-Site in Europe: Firsthand Research & Investment Insights

February 26, 2025

At Harding Loevner, we believe the best investment decisions are informed by firsthand research, direct conversations with managers and engineering teams, and understanding how industries evolve in real time. That’s why Portfolio Manager and Communication Services Analyst Uday Cheruvu, CFA, recently traveled across Western Europe to attend a series of events including the Semicon Europa trade show and the Morgan Stanley Technology, Media, and Telecom conference. Over two weeks, he engaged with industry executives, engineers, suppliers, and other experts to gain deeper insight into how innovative companies differentiate their products.

From learning how SAP’s software is perceived by its IT-services partners, to seeing the unique technology that forms Keyence’s competitive advantage in automation, Uday shares his key takeaways from the trip.

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What If Fashion Were Taxed Like Cigarettes?

By Maria Lernerman, CFA, Analyst and Portfolio Manager | May 22, 2024

The fast-fashion industry produces a lot of waste but has largely avoided any consequences for its impact on the environment. That is starting to change.

The lower house of France’s Parliament passed a bill in February that would impose a “sin tax” of up to 10 euros or 50% of the selling price on fast-fashion clothing, a severe penalty given that many of these products cost less than €10. The bill would also ban advertising and demands that companies in the industry disclose the environmental impact of their businesses. The bill was approved unanimously and moved to the upper house of Parliament. If it becomes law, it will make France one of the first countries to impose this type of penalty on fast-fashion companies.

Fast fashion has become a roughly US$120 billion industry and is projected to grow to US$185 billion by 2027. Shein, H&M, Temu, Zara, and others have built worldwide businesses by creating cheap clothing in bulk as quickly as possible to respond to changing fashion trends, especially for a growing global middle class with more disposable income. The crux of the problem is that fast fashion tends to encourage what many consider an excessive amount of consumption. Traditional clothing companies might release new lines four times a year; fast-fashion companies do so weekly or even daily. The clothes are designed to be relatively cheap and worn for a short period of time before being discarded, sometimes after only seven or eight wears. Consumers are then expected to buy the next hot thing. The result? People are buying more clothes, an estimated 60% more, but keeping them only half as long as they would a more durable, higher-quality piece of clothing.

Those dynamics exacerbate the environmental impacts of an industry that is inherently polluting to begin with. Conventional textile mills generate about one-fifth of the world’s industrial water pollution. About 20-35% of all the microplastics in the world’s oceans come from microfibers shed by clothes as they are washed. The industry also produces veritable mountains of unsold clothing, which get burned or thrown into landfills strewn around the Global South. (Shein, for one, has argued that its business model better matches supply with demand and produces less unsold clothing).

The photograph above was taken by Maria Lernerman, who came across the Shein-labeled piece of plastic while on vacation.

Businesses with a high-volume, low-price model, such as Shein and Temu, would be the most vulnerable to a tax like the one France is contemplating, given higher prices would test consumer demand. The effects would also depend on how the French regulation ends up defining “fast fashion.” It may cover only the “fastest” companies, such as Shein and Temu, or it could include older, more established players like Zara and H&M. An advertising ban would severely limit companies’ ability to grow, and the tax would cut into both growth and profits. While it would be a competitive benefit for “slower” fashion companies, placing severe costs and restrictions on even part of the industry could cement the image of fashion as “sinful,” making it easier for other governments to levy taxes or fees on all players over time. Lastly, a bill such as this could be politically divisive, opposed by consumers who are already facing economic strains.

On one level, France’s bill is aimed directly at the environmental impact of fast-fashion companies, but there is another motive behind the bill. This bill would give a competitive advantage to France’s domestic fashion and retail industry and protect it from upstarts. But lawmakers in other jurisdictions are also looking at the industry. The EU’s European Commission has been working for four years on regulations for the industry that should enter into force by 2030. In the US, state lawmakers in New York and California have introduced bills that address the fast-fashion industry’s environmental effects. And in 2022, Massachusetts banned textiles being thrown out in the garbage, mandating they be recycled.

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Out of Our Minds

Why Analysts May Be Wrong About L’Oréal

Source: FactSet.

The Other Novo Doesn’t Need Ozempic

On-Site in Europe: Firsthand Research & Investment Insights

What If Fashion Were Taxed Like Cigarettes?

The photograph above was taken by Maria Lernerman, who came across the Shein-labeled piece of plastic while on vacation.

Disclosures