Investing.com -- Shares of L'Oréal (EPA:OREP) dropped on Wednesday following a downgrade by JP Morgan, which revised its rating to "underweight" from "neutral."
At 4:13 am (0813 GMT), L'Oréal was trading 3% lower at €365.20.
The downgrade is attributed to the weakening global beauty market, which is slowing faster than anticipated.
L’Oréal, a dominant player in the industry, has been under increasing pressure as growth rates in key markets like China and the U.S. decelerate.
Analysts at JP Morgan revised their outlook, expressing concerns about the company’s ability to sustain its premium valuation in light of these market headwinds.
JP Morgan cited multiple factors contributing to the downgrade, including normalization of pricing after a period of inflation-driven growth, weaker consumer demand for skin care and makeup products, and increased competition from emerging local beauty brands such as Proya and ELF.
The analysts noted that while L'Oréal had managed strong performance during the 2020-2024 period, supported by its multipolar growth model across several regions, the deceleration in China's beauty market—a key growth driver for the company—cannot be ignored.
The brokerage also flagged the risk of inventory adjustments in developed markets as retailers begin to destock amid a slower sales environment.
“We expect growth range of 4.5% in FY25; we cut EPS25e by 3% sitting 6% below consensus,” said JP Morgan.
Despite L’Oréal's efforts to mitigate the impact of the slowdown, such as expanding into new regions and products, JP Morgan expressed doubts about the company's ability to continue outpacing market growth.
With the company’s shares already down 16% year-to-date, the stock now trades at a steep premium compared to its peers in the European consumer staples sector.
The analysts cautioned that L'Oréal's valuation might erode further as its growth rates converge with those of its competitors.
JP Morgan set a new price target of €325 for L'Oréal by December 2025, much lower than the previous target of €390.
This downgrade reflects the brokerage’s belief that the beauty giant is entering a period of slower growth, compounded by potential profitability challenges, especially in China, where local competitors are gaining ground and premiumization trends are faltering.