These 4 global beauty stocks could soon join a 'billionaire club,' BofA says

Published Tue, Jun 8 20217:36 PM EDT

Lucy Handley @in/lucy-handley-b2b0a61a/@lucyhandley

Analysts at Bank of America have picked out beauty stocks that they believe will come back "stronger than ever" from the coronavirus pandemic. Within the beauty industry, the "sweet smell of opportunity" is likely to come from the $26 billion perfume market, according to BofA in a research note published in May. While fragrance sales decreased $5 billion year-over-year in 2020, the sector is set for a rebound due in part to a better e-commerce experience for shoppers, the analysts said. Some fragrance brands could become part of a "billionaire club," they added, meaning they could make more than $1 billion in annual product sales. BofA's buy-rated stock picks are: Beauty giant L'Oreal made 2.8 billion euros ($3.4 billion) in perfume sales in 2020 — or 10% of its overall revenue, BofA said. It is the number-one company in the fragrance industry and makes perfume for the likes of fashion brands Prada and Valentino under license. Its Giorgio Armani and YSL brands — encompassing skincare, makeup and fragrance — are part of a "billionaire club," the analysts said. French luxury group LVMH has a 12% share of the fragrance industry, and its brands including Givenchy, Guerlain and Christian Dior contributed 1.8 billion euros to group sales last year. BofA likes the fact that it makes its fragrances in-house, rather than licensing its brand names to perfume manufacturers. "LVMH's competitive advantage lies in its well-diversified brand portfolio, on-brand communication, in-house manufacturing and high quality distribution," the analysts stated. Perfume ingredients supplier Givaudan is a pick for BofA, which likes its master perfumers, known as "noses," as well as its range of molecules — the constituent parts of an aroma that the company has filed patents for. The analysts also noted its "high margin" business. Fine fragrance maker International Flavors & Fragrances (IFF) has a market share of around 20% in the perfume ingredients sector, BofA said, and the bank likes its "healthy and stable" margins. "While IFF does not disclose the margin profile for its Fine Fragrance business, it has commented that gross margins are between 50 to over 60%," the analysts stated. "As lockdowns are being eased, we think fragrances, one of the beauty industry's main casualties of Covid-19, are bound to come-back; and arguably stronger than ever as brands have been adjusting to life in a digital world," the analysts stated. To join the "billionaire club," a perfume brand must outperform the market through innovation and premiumization, and the "cherry on the cake" is when a brand enters other categories such as make-up and skincare, according to BofA. However, apparel brands have sometimes found it hard to do well in beauty, the analysts said. "Fashion does not 'naturally' fit into a category much more associated with research and technology than glossy advertising. Consequently, only five of the top-23 fashion/luxury brands currently have a position in skin care," they wrote. These are Tom Ford, Dior, Givenchy, Giorgio Armani and YSL. "Over the 2010-2019 period, companies like Estée Lauder and L'Oreal have consistently outperformed the fragrance category; and while LVMH does not provide granularity by category, we would assume that it has done so also, given solid (+9%) organic top-line growth in Perfumes & Cosmetics," the analysts added.

Buena Vista Images | Stone | Getty Images

Analysts at Bank of America have picked out beauty stocks that they believe will come back "stronger than ever" from the coronavirus pandemic.

Within the beauty industry, the "sweet smell of opportunity" is likely to come from the $26 billion perfume market, according to BofA in a research note published in May.

While fragrance sales decreased $5 billion year-over-year in 2020, the sector is set for a rebound due in part to a better e-commerce experience for shoppers, the analysts said. Some fragrance brands could become part of a "billionaire club," they added, meaning they could make more than $1 billion in annual product sales.

BofA's buy-rated stock picks are: