CHDRF - Christian Dior: Buy On This Dip

2023-08-14 05:43:57 ET

Summary

• With a drop in Christian Dior's stock price since May, the Buy case for it has strengthened, especially on continued revenue growth, improved margins, and attractive market multiples.
• With an expected softening in revenue growth in 2023 and 2024, investor diffidence could show up in the stock price movements. However, a possible elevated net income margin could cushion the downside.
• In any case, long-term price returns from the stock are good, and dividend income is an added positive.

Since the last time I wrote about the luxury fashion brand and company Christian Dior ( CHDRF ) in May, its price is down by 9.6%. I had a Buy rating on it at the time, and going by the developments since I believe the case for this rating has only got stronger. Here's why.

Why did the price fall?

As it happens, Dior's essentially a proxy-LVMH ( LVMHF ) play. LVMH owns it and in turn, it owns a 41% stake in LVMH and 57% of the voting rights. As a result, both companies have basically the same key financials like revenues and operating profits. Only Dior's group share of net profit is smaller, which shows up in a much lower net margin compared to LVMH.

It follows, then, that CHDRF and LVMHF move in tandem (see the price returns chart below). No surprises there. Now, when I last looked at LVMH in June, it wasn't a Buy case following weakness in demand from the US reflected in its trading update for the first quarter of 2023.

If the US market remained weak, revenue growth could have declined from the 17% seen then. Note that it was already down from the 23% increase seen in 2022. The relatively slower revenue growth and little indication of meaningful cost softening also meant that the net income margin could decline in 2023.

The weakness in fundamentals coupled with its 30.7x trailing twelve months ((TTM)) price-to-earnings ratio, indicated it was fairly priced considering the five-year median P/E of 30.2x, even if there did appear to be some upside compared to peers then. It's little wonder then that LVMHF has seen a correction of over 8% from that time. And that's reflected in CHDRF as well.

Surprisingly good first-half results

But LVMH can be trusted to pull a rabbit out of the hat. And it's done that again with the release of its results for the first half of the year (H1 2023). Here's how. First, despite a worsening in US demand, which is now shrinking, the company managed to pull a 15% year-on-year (YoY) reported growth and 17% organic growth as an Asia ex-Japan demand surge came to the rescue.

But to me, the real story is the improvement in net income margin to 20.1%, up from the already high 17.8% on improved interest and investment income. Commensurately, Dior's net income margin has improved to 8.3%, a one percentage point increase from last year.

Note that this isn't the trickle-down from the operating level that I had factored into my assessment. That means, there's no way of saying whether the company's margin can stay elevated in H2 2023 as well since it's not coming from an operating basis. But for now, it has a bearing on the company's forward multiples.

Multiples look improved

Assuming that Dior and LVMH's revenue growth slows down further to 11.8% for the full year 2023, as per analysts' estimates and the net income margin remains at its present levels, CHDRF's forward price-to-earning (P/E) ratio comes to 19x for this year. Even if the remainder of this year doesn't see the same net income margin and by the end of the year, it averages between 2022 and H1 2023's numbers, the forward P/E is still at 20.2x.

For perspective, CHDRF's median P/E for the last five years is 29.3x . Admittedly, this is a trailing twelve months ((TTM)) figure, but it gives some idea of where the stock's been. Also, its current TTM P/E is at 21x, which is below the average figure. Further, it has also fallen from the 26.8x it was at when I last wrote on the stock.

But a discussion on Dior's market valuations isn't complete without taking LVMH into account. LVMHF's forward P/E is at 23.2x as per my estimates, if the net income margin for 2023 remains at the same level as seen in H1 2023. It rises to 24.6x if the margin averages between those seen for H1 2023 and the full year 2022. This, too, is lower than its average historical P/E as noted above. In fact, its current P/E too is at 25.7x, which makes it attractive in any case. In other words, both LVMH and CHDRF are looking attractive right now from the market multiples perspective.

Consider the long term

There's of course the risk that the company's softening revenue growth could make investors less favourably inclined towards the stock. It doesn't help that analysts expect a further growth slowdown next year.

But at the same time, there's little reason to expect any significant downside either. If anything, over time, it will only rise. Just consider its long-term returns. Over the past 10 years, its price has risen by 432% and if we add in the dividends, the returns increase to 527.5%. The returns look good, even if I look at shorter periods of five or three years. In any case, it's worth noting that CHDRF is rather illiquid, so it's ideally bought with a substantial holding period in mind.

What next?

Christian Dior looks even more attractive now than it did when I first wrote about it, as I was saying at the start. Not only has its price dropped, but the earnings outlook has actually improved. As a result, its market multiples look much better than they did in May. They didn't look bad even then, but CHDRF traces the movements of LVMHF, which was fairly valued at the time.

Going forward, I don't rule out some more ups and downs as opposed to a secular rise, going by some uncertainty around demand and muted revenue growth outlook for the next year. At the same time, its long-term price rise is notable. It essentially indicates that despite any volatility, it is a good one to buy on the current dip and hold for a long time.

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