3 Beauty Stocks for a Portfolio Makeover

Leading names in the beauty and personal care industry, with their expanding global footprint, sophisticated product offerings, and a strong commitment to innovation, are well-positioned to capture a significant share of the global market, projected to grow from US$552 billion in 2022 to US$750 billion by 2032, at a CAGR of over 3%.

1. L'Oreal LRLCY
2. Estée Lauder EL
3. Unilever UL

L'Oreal LRLCY

Analyst: None

• Forward Dividend Yield: 1.43%
• Price/Quantitative Fair Value: 0.87
• Quantitative Economic Moat: Wide
• Capital Allocation Rating: None
• Quantitative Morningstar Rating: 1 star
  
  

World’s largest beauty company, L’Oreal sells skincare (40% of sales), makeup (20%), haircare (27%), fragrance (9%), and sanitary products (4%) under such leading brands as Lancôme, Yves Saint Laurent, Maybelline, Kiehl’s, L’Oreal Paris, Garnier, and Armani.

The firm generates 32% of its sales at home in Western Europe, 27% from North America, 26% from North Asia, and the remaining 15% from various emerging markets in South Asia, Latin America, and Africa.

L’Oreal has built an impressive collection of top-selling beauty brands within several segments including skin care, makeup, hair care, and fragrance catering to both premium and mass markets.

“Its strong brand differentiation based on innovation, marketing, and consumer experience, coupled with scale-based cost advantages, should support a durable competitive edge, enabling the firm to deliver excess returns for more than 20 years,” says a Morningstar equity report.

The cosmetics giant is poised to benefit from mid-single-digit growth in beauty demand in the coming years, supported by disposable income among emerging market consumers and their desire to upgrade to global brands.

With a global distribution network and local teams attuned to regional preferences, the company is “well-equipped to attract and retain these consumers, offering a wide range of relevant products at accessible price points,” says Morningstar equity analyst Dan Su, who recently raised the stock’s fair value to EUR 410 from EUR 400 and forecasted high-single-digit revenue CAGR over the next 10 years.

Estée Lauder EL

Analyst: Dan Su, CFA

• Forward Dividend Yield: 2.14%
• Price/Fair Value: 0.59
• Economic Moat: Wide
• Capital Allocation Rating: Standard
• Morningstar Rating: 5 stars
  
  

Estee Lauder dominates the global prestige beauty market, with top-selling brands like Estee Lauder, Clinique, M.A.C, La Mer, Jo Malone London, and Bobbi Brown. In 2023, sales were distributed across skin care (52%), makeup (28%), fragrance (16%), and hair care (4%) categories.

The global company generates 28% of revenue from the Americas, 39% from Europe, the Middle East and Africa, and 33% from Asia-Pacific.

Estee Lauder has built and bolstered its leadership position with category-leading brands in skin care, cosmetics, and fragrances. Furthermore, it enjoys a preferred vendor status across brick-and-mortar and digital channels.

“These attributes, coupled with scale-based cost advantages, should augur a long-term competitive edge that enables the firm to deliver excess returns [for over two decades],” says a Morningstar equity report.

The wide-moat firm is set to capitalize on premiumization trends, with beauty consumers in both developed and emerging markets seeking upgraded products for their perceived superior ingredients and effectiveness.

Outside its home market, Estee excels in Asia, where skin care accounts for 50% of premium beauty spending. Estee's renowned brands, La Mer and Estee Lauder, and its new innovation centre and factory in the region, will enable timely delivery of locally relevant products, says Su, who puts the stock’s fair value at US$210 and forecasts 7% revenue CAGR over the next 10 years, driven by steady, mid-single-digit increases in premium beauty demand globally, and Estee’s ability to outpace the overall market. 

Unilever UL

Analyst: Ioannis Pontikis, CFA

• Forward Dividend Yield: 3.36%
• Price/Fair Value: 0.98
• Economic Moat: Wide
• Capital Allocation Rating: Standard
• Morningstar Rating: 4 stars
  
  

Known for its globally recognized Axe, Dove and TRESemmé brands, Unilever operates a diversified business including personal-care (52% of sales), homecare (14%), and packaged food (34%). Apart from personal care products, it also owns well-known food brands including Knorr soups and sauces and Hellmann's mayonnaise.

The Anglo-Dutch company recently showed better than expected quarterly sales, boosted by its beauty segment. Beauty and wellbeing stood out with a 5.6% volume increase in the first quarter, while personal care also performed well with mid-single-digit organic growth and a 1.4% jump in volume.

“The firm’s broad portfolio of products across multiple categories and supermarket aisles creates a virtuous cycle of competitive advantages comprising intangible assets and cost advantages that new entrants cannot easily replicate,” says a Morningstar equity report.

Unilever has been investing in key brands and categories, organically and through bolt-on acquisitions (beauty and well-being) while shedding low-growth tea and spreads businesses.

Unilever derives well over half of its sales from emerging markets, giving it one of the largest footprints among global consumer staples manufacturers, creating a long growth runway.

“Population growth, urbanization, and economic growth are secular drivers in emerging markets, where the company sources over 60% of its sales (with China and India accounting for over 15% of group sales), which should support medium-term volume,” says Morningstar equity analyst Ioannis Pontikis, who pegs the stock’s fair value at US$56 per ADR.