LVMHF - LVMH Could Be An Investor's Dream Stock

2023-06-16 11:23:59 ET

Summary

• The company benefits from a rising number of millionaires and billionaires.
• The valuation is not cheap, but rarely is.
• This is a high-quality business: strong and even increasing margins, hardly any debt, insider purchases, growing dividends, increasing revenues.

Investment Thesis

LVMH ( LVMHF , LVMUY ), is one of the highest-quality companies you can buy. Whether it is a buy or a strong buy depends on the valuation. Currently, the stock is trading at the upper end of its valuation scale and is, therefore, only a buy. The reason for my enthusiasm? Rising revenues, improving margins, worldwide known and highly recognized brands, hardly any debt, little risk, etc.

Company Overview

LVMH was formed in 1987 from the merger of Moët Hennessy and Louis Vuitton, and is today the world's leading luxury company. The portfolio of the French luxury company, headquartered in Paris, today includes 75 brands, which LVMH divides into five business segments:

• Fashion & Leather Goods: The Fashion & Leather Goods Business Group includes Louis Vuitton, Christian Dior, Fendi, and more. This area accounts for 49% of total sales.
• Wines and Spirits: LVMH produces high-end cognac and champagne. The product portfolio includes, for example, Moët, Dom Pérignon, Hennessy, Belvedere, Glenmorangie, and Ardbeg. 2022 Wines and Spirits accounted for approximately 9% of Group sales.
• Perfumes and Cosmetics: LVMH is a major player in the perfume, make-up & skincare sector with well-known brands such as Christian Dior and Givenchy. The Perfumes and Cosmetics business unit accounted for around 10% of sales in 2022.
• Watches and Jewelry: LVMH's newest business unit comprises high-end watches & jewelry with brands such as TAG Heuer, Tiffany & Co., and Bulgari, accounting for around 13% of sales in fiscal 2022.
• Selective Retailing: This includes retail & duty-free stores. Selective Retailing was responsible for approximately 19% of Group sales in 2022.

By the way, CEO Bernard Arnault owns about 42% of the company and overtook Elon Musk in 2022 as the wealthiest person.

The market for luxury goods

There are more and more millionaires and billionaires worldwide, and overall their wealth continues to rise. Therefore, the potential clientele for luxury brands is also increasing. Whether you find luxury brands beautiful or not, the demand for them will always be there: these are things that not everyone can afford and are, therefore, status symbols. Throughout the history of mankind, status symbols have always played a role in showing off one's place in the social hierarchy to the outside world. As far as that is concerned, we are not very different from our ancestors.

In 2022, the luxury goods market experienced a robust rebound, growing by 19-21% to reach a total value of €1.15 trillion. This positive momentum is expected to persist in 2023, with predicted growth rates ranging from 3% to 8% for personal luxury goods.

Both established and emerging markets fuel the global luxury market's growth. While regions like the US and Europe remain strong, promising growth is expected from India, Southeast Asia, and Africa. For instance, India's luxury market could see an expansion of up to 3.5 times its current size by 2030. Additionally, despite some setbacks due to Covid-related disruptions in 2022, the important Chinese luxury market is forecasted to recover by the latter half of 2023.

Diversified worldwide

I like when companies are positioned globally. Local recessions and currency fluctuations are balanced out. Also, some regions of the world are stagnating in population, while others are still growing. It is also a huge advantage for a company like Louis Vuitton, with its focus on luxury, when countries become wealthier, i.e., the upper classes grow. Today, Asia is the largest market for the company, followed by the USA and then Europe.

2022 Results & Trends

The company had a very strong year in 2022 and benefited strongly from the well-known post-pandemic shopping recovery. To increase sales by 23% and net profit by 17% at this level in just one year is very strong.

One of the significant advantages in the luxury segment, be it Ferrari (RACE) or fancy handbags, is that strong margins are achieved. These can be maintained or expanded long-term because the companies have pricing power and the customers have enough money. A status symbol remains a status symbol, or becomes even more valuable to the customer the more expensive the price is.

In this long-term chart, you can see how constantly both sales and margins are rising. Only in 2020, the year of the pandemic, did revenues fall. The green dashed line is the net income margin. Revenue was €11B in 2003 and €79B today. All this while the margin is increasing because the company has pricing power.

Given this solid performance, it is hardly surprising that the stock has significantly outperformed the S&P500 over almost all periods.

Overall, this growth has not only occurred organically, but the company has made numerous acquisitions of individual brands over the past decades. Hence, the total portfolio today consists of about 75 brands. As mentioned, the company is active in various areas, but the overriding theme remains the high-end luxury sector.

Q1 2023

In the first quarter of this year, there was a 17% increase in revenue YoY, with the following geographical distribution of growth.

And here is an overview of how the company's various segments performed compared with the previous year.

Valuation & Dividend

The company is currently valued at an enterprise value of $483B. The market cap is $455B, and the debt less cash is approximately $26B.

Unfortunately, Seeking Alpha does not fully display the P/E ratio data (forward P/E). According to Yahoo Finance, the trailing P/E is 30, and the forward P/E is 26. So the company is not cheaply valued but gets a premium valuation attributed by the market due to the moat-like market position. However, if we look at the long-term development of the P/E ratio, it has rarely been below 20 and mostly between 20 and 30. Accordingly, the company is trading at the upper end of its historical valuation scale.

Otherwise, we can assume that the company will do what it has done successfully over the past 20 years: acquire other brands, use its pricing power to increase margins (increase their prices at a higher rate than inflation is rising), and increase revenues and dividends. The 5-year dividend growth rate is 22%.

Risks

I find it quite difficult to identify significant risks in this case. Of course, general risks affect almost every business in the non-essential goods sector. The risk of the economy weakening and more bankruptcies could affect even wealthy people. However, the risk of a smaller crisis is less significant: wealthy people are less affected by temporary inflation or higher gasoline prices than the middle or upper middle class.

One uncertainty that existed last year was the business in Russia. Or also the European business where Russians were welcome customers. What exactly happened to it is not so easy to find out, and my current status after internet research is as follows:

• In July 2022, the company's sub-brand Sephora ceased its Russian operations and temporarily closed its stores .
• In October 2022, the stores reopened under a new brand called Ile de Beauté.
• There is news from 2008 on the official website of LVMH that Sephora owns 45% of Ile de Beauté.

It sounds to me like the business is getting a little more nested but continuing. Overall, you can see from the company's results that this hasn't led to a sudden drop in sales. Besides, the Russians can visit the stores in China or anywhere else in the world anyway.

Share dilution, insider trades & SBCs

For me, these three things are standard checks I make in every article, as excessive stock dilution and stock-based compensation can put us, shareholders, at a disadvantage. In addition, insider trades sometimes contain valuable info about the confidence of management itself.

Information on SBCs could not be found here, the number of shares outstanding tends to decrease slightly, and on the home stock exchange in Paris, there has been repeated insider buying, including by CEO Bernard Arnault.

Conclusion

Overall, this is a high-quality business: strong and even increasing margins, hardly any debt, insider purchases, growing dividends, increasing sales, and little risk. Everything a shareholder could wish for. Just like the products of the company: quality has its price. The valuation is not cheap, but it rarely is. For me, the stock is almost always a buy (and long-term hold), and on rare occasions when P/E valuations of around 20 occur, it would be a strong buy. That's why I only rate it a buy right now.

Personally, I buy the stock on the Paris stock exchange in Euros.

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