This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

L'Oreal: Accretive Buyback But Stock Slumps 7 Percent - A Mystery

By Alex Gavrish, Etalon Investment Research; author of " Wall Street Back To Basics "

L'Oreal

L'Oreal announced buyback of an 8% stake from Nestle

On February 11 th, 2014 Nestle SA VTX:NESN and L’Oreal SA EPA:OR OTCMKTS:LRLCY announced strategic transaction in which L'Oreal will buy 48.5 million of its own shares which represent 8% of its share capital. Despite a meaningful size of the buyback which is expected to be accretive to L'Oreal, the share price immediately started to move lower and had declined by about 7% since the announcement. This strange fact caught our attention and we decided to take a closer look at the transaction and current valuation of L'Oreal.

Nestle buyback transaction

L’Oreal SA EPA:OR OTCMKTS:LRLCY will buy 48.5 million of its shares 8% of its share capital. Part of shares will be bought for a cash payment of 3.4 billion euros for 27.3 million shares, reflecting a price of 124.5 euros per share. The second part of the transaction will be done through the disposal by L'Oreal of its 50% stake in Swiss dermatology pharmaceuticals company Galderma a 50/50 joint venture between L'Oreal and Nestle for an enterprise value of 3.1 billion euros an equity value of 2.6 billion euros, and will be paid by Nestle SA VTX:NESN in L'Oreal shares 21.2 million shares. Based on the equity value, the share price is 122.64 euros per L'Oreal shares. Overall, the buyback reflects a total payment of 6 billion euros using equity value for Galderma, 48.5 million shares and purchase price of 123.71 euros per share.

Valuation summary

To start with balance sheet and debt, L’Oreal SA EPA:OR OTCMKTS:LRLCY has almost no short or long-term debt, and as of December 31 st 2013 net debt amounts to a net cash holding of 2.2 billion euros and minimal amount of long-term debt. L'Oreal owns an 8.93% stake in Sanofi SA (SNY - Get Report) EPA:SAN, a large French pharmaceutical company. Based on a recent market price, this stake is valued at about 8.6 billion euros.

As of March 20 th, 2014, L’Oreal SA EPA:OR OTCMKTS:LRLCY had a market capitalization of 70.3 billion euros and an enterprise value of 68.1 billion euros. After adjustment for buyback transaction, market capitalization stands at 64.6 billion while enterprise value is 62.4 billion euros. If we subtract the value of the stake in Sanofi SA (SNY - Get Report) EPA:SAN, enterprise value stands at 57.3 billion euros. In fiscal 2013 company generated 4.7 billion euros in EBITDA, so the EV/EBITDA multiple is currently x12.2 - a very reasonable valuation for such high-quality company as L'Oreal. In 2014 the company expects to pay a dividend of 2.5 euros per share, which based on a recent share price, equals a 2.2% annual dividend yield.

At current valuation L’Oreal SA EPA:OR OTCMKTS:LRLCY might be attractive for a long-term oriented investor. It also might be suitable for an income-oriented investor who is looking for additional downside protection. As an illustrative example, you can commit to buy L'Oreal at 110 euros per share by selling a cash-secured put option contract that expires in December 2014, has an exercise price of 110 and is currently selling for a 6.08 euros premium. This would provide you an annualized income yield of 7.8% while also leaving a downside protection of 10% from the current market price as you would have to purchase shares at 110 euros while receiving a premium of 6.08 euros from option sale making your effective purchase price equal to 103.92 euros per share.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
LRLCY $36.28 0.50%
NSRGY $77.74 -0.61%
SNY $48.36 0.04%
AAPL $126.41 -1.66%
FB $81.21 0.39%

Markets

DOW 18,135.72 +38.82 0.21%
S&P 500 2,101.04 +2.51 0.12%
NASDAQ 4,982.8090 +15.6680 0.32%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs