In short: A published pass with a named entry price: "L'Oréal is a wonderful business but the future growth prospects are too low. I would love to own L'Oréal at 20x earnings… a price of €271 (current stock price: €367.4)." Classified as an Owner-Operator; Total Quality Score 7.8/10 at €184.8bn. The strengths: number one worldwide with a 14.5% market share, 37 brands in 150 countries, four segments (Consumer 36.5%, Luxe 35.4%, Dermatological 16.4%, Professional 11.7%), gross margin 74.3%, net margin 13.9%, FCF/net income 116.9%, CAPEX/sales 3.4%, interest coverage 24.3x, SBC 4.8% of net income, and governance scored 9/10 — six CEOs in 115 years (19-year average tenure vs an 8.1-year norm), CEO Nicolas Hieronimus with €87.2m of stock and Françoise Bettencourt on 29.5%. The failures are recorded rather than argued away: ROIC 13.9% (<15% ❌), ROE 18.0% (<20% ❌), goodwill/assets 23.4% (>20% ❌), ten-year owner's-earnings CAGR 9.1% (<12% ❌) and a CAGR since 2001 of 8.2% (<12% ❌). Valuation splits: forward PE 27.0x vs a 31.5x ten-year average ✅, but the earnings-growth model returns 8.0% ("we target a higher expected return") and the reverse DCF implies 13.0% FCF growth against 8.7% delivered ❌. "There are more attractive companies today if you ask me."
L'Oréal is the biggest beauty company in the world. It owns about 37 brands — Maybelline, Garnier, Lancôme, L'Oréal Paris — sells them in 150 countries, and takes roughly one in every seven euros spent on beauty products globally. Making shampoo and lipstick costs very little relative to what people pay for it, so about three-quarters of every euro of sales is left after the cost of the product itself.
It is also unusually well run for a company this old. In 115 years it has had six chief executives — an average of nineteen years each, against about eight years for a typical company — and the founder's granddaughter still owns almost 30% of it and sits on the board. Owners who cannot easily leave tend to think in decades, and that is the single highest score this write-up gives the company.
The business also barely needs money to run. It spends only about 3% of sales on equipment and buildings, and it turns more cash into shareholders' hands than it reports as profit. It hands out almost no free shares to staff, which is a real cost at many companies and almost none here.
So why is it not bought? Because it is too big to grow fast, and the shares are priced as if it will. Sales are already around $52 billion a year, and the analysts' own forecast is for revenue to grow about 5% a year. Working backwards from today's share price, buyers are effectively assuming the company's spare cash grows 13% a year for the next decade — a rate it has never come close to, having managed about 8.7% over the last ten years.
Two other things are quietly wrong. The return the company earns on the money invested in it (about 14%) is below the standard this framework insists on (15%), and a fifth of its assets are goodwill — the premium paid for brands it bought rather than built. And the moat itself gets an honest question rather than an answer: L'Oréal spends about a third of its revenue on advertising, which raises the possibility that the brand's strength is being rented every year rather than owned outright.
The conclusion is a wonderful business at the wrong price, with the right price stated: 20 times earnings, or €271 a share. It costs €367.40 today.
In short: Terry Smith's third-largest position, written as $OR — the Paris listing. Named only as part of the Fundsmith top three; the archive's own view on it comes later, in a dedicated L'Oréal write-up.
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