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Makeup isn't new, why care now?

We take a closer look at the cosmetics industry and some key players in the market.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Makeup and skincare is nothing new. There's evidence of skin creams in use in ancient Egypt.

Fast forward a few thousand years and the cosmetics industry is expected to be worth $805.6bn by 2023, growing over 7% a year – almost double the rate of global GDP. This growth is being driven by social factors, namely today’s obsession with health and wellness – but this isn’t a flash in the pan, beauty doesn’t date, it’s never out of fashion to look your best.

All investments fall as well as rise in value, so you could get back less than you invest. Past performance is not a guide to the future.

Global cosmetics industry growth vs global GDP

Source: IMF (Global GDP Growth Rate) and L’Oreal (Cosmetics Industry Growth Rate).

Scroll across to see the full chart.

L’Oréal – more than just a pretty face

The appeal of this cosmetics giant runs deeper than its rows of lipsticks and shampoos. The €134.5bn group, which remains partly-owned by the Bettencourt Meyers family, is home to 36 brands including Maybelline, Garnier and of course L’Oréal itself.

Having such strong brands doesn’t just sound impressive, it’s good for business. Customers are loyal to the brands they know and love, so revenue streams are more reliable. It would take something drastic for someone to swap their favourite Garnier moisturiser to a store own-brand.

This reliable income enables the group to pump cash into developing and marketing new products, so L’Oréal can take an even greater share of customers’ wallets, which results in more steady income and so the cycle continues. Powerful brands really do pay their dues, the group had sales of €26.9bn last year, which fed into operating profits of almost €5bn. Remember, this performance is not guaranteed to continue.

L’Oréal’s stable of brands is growing too, with a steady stream of acquisitions – it bought five companies last year. Buying exciting new businesses can be more efficient than trying to create your own star product. There’s less risk involved with taking over a developed business, compared to ploughing your own cash on a new, untested concept. L’Oréal’s newly acquired ModiFace, a beauty AI company, which allows customers to virtually try on makeup, is as an example of this in action. This bolt-on approach has helped keep capital expenditure and margins tightly controlled.

Rapidly expanding wealth in emerging markets, particularly Asia, has also been working in L’Oréal’s favour. The region is now the group’s second largest, and fastest growing, market. Higher levels of disposable income and aging populations is good news for the sales of makeup, serums and night creams.

Reliable sales, growth potential, and a sensible approach to cost means the modest 1.7% yield is expected to grow, although this is variable and not a reliable indicator of future income. However, the highlights come at a price. The shares change hands for 29.9 times expected earnings, 13.6% above the longer term average.

Find out more about L’Oréal

Beiersdorf – sometimes less is more

Beiersdorf offers investors something different but with many of the same appeals as mainstream beauty groups.

The bread and butter of the business is the consumer division which makes up 81% of the business – including the huge Nivea brand.

Beiersdorf has a reputation as an expert, hardly surprising given the c. €200m being spent on research and development every year. The group has labs all over the world, each exploring different skincare needs across diverse demographics, and creating specific products. We like this focused approach – it tends to mean a company knows its audience particularly well. It’s helped the group to take market share, despite tough competition.

Growth in the skincare industry vs overall beauty market

Source: L’Oréal annual report 2018

Scroll across to see the full chart.

But that’s not all, Beiersdorf is at the start of a multi-million euro investment plan. Margins, currently 15.2%, are likely to suffer in the short run – but the focus on emerging markets and digitalisation is the right move in our view. The potential is huge, with a particular focus on e-commerce in China. New retail and import relationships gave Beiersdorf access to an extra 900m potential users last year.

It’s also worth noting the remaining 19% of the business is comprised of the Tesa arm, which manufactures sellotapes. The division’s been growing steadily and offers an alternative source of revenue, but we find it hard to get too enthused about the division.

Still, we like that the group’s majority family-owned, with 51% of the company owned by the Herz family trust. Family owners tend to be keen on passing companies on to the next generation, which translates into sensible, long-term leadership. We suspect that’s why Beiersdorf’s spending is cautious, and why cash levels are expected to rise, despite the new investment spree. Analysts think there’ll be a cash hoard of £3.5bn by the end of next year.

That does rather beg the question, ‘what is Beiersdorf planning to do with all that cash?’ There’s no real yield to speak of, so we can’t help but wonder if the German giant is lathering up to buy something big to propel growth even further.

Overall, we’re fans of Beiersdorf. A specialised offering and rapidly growing cash pile sounds like a good formula to us, and a price to earnings ratio of 30 suggests we aren’t the only ones that think so. Of course that means there’s pressure on the new strategy to yield impressive results too

Find out more about Beiersdorf

A pretty penny for investors?

Overall, we think cosmetics is an industry that should turn your head.

Social media influencers and celebrities are pushing new looks and products to younger audiences. Selfie-obsessed, developed nations are being tempted by evermore swanky, expensive products while developing countries are becoming a more valuable market.

There’s a lot of good news for companies making money from makeup, we believe both L’Oreal and Beiersdorf have something to offer investors.

Find out more about overseas share dealing

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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