LVMHF - LVMH: Luxury Winter May Be Slowly Approaching (Rating Downgrade)

2023-12-13 03:32:32 ET

Summary

• I continue to view LVMH as an attractive GARP investment; however, near-term outlook going into early 2024 is setting up to be more challenging than previously hoped.
• LVMH's Q3 performance missed estimates, indicating a slowdown in luxury demand -- likely extending to both volume and pricing.
• The consensus EPS for LVMH has been downgraded through 2025, reflecting concerns about declining global luxury consumption volume.
• The updated EPS estimates suggest a fair implied stock price of $190.53/share, leading to a downgrade to "Hold".

I have previously assigned a "Buy" rating to LVMH ( OTCPK:LVMHF ) stock, arguing that the conglomerate is well positioned for long-term out-performance in a highly attractive sector, consumer luxury goods. Although I continue to view LVMH as an attractive GARP investment, I believe the near-term outlook going into early 2024 is setting up more difficult than hoped, mostly as a consequence of deterioration in overall demand for luxury across the globe, and especially in China. That said, however, LVMH should still perform better than some of the company's peers who lack the product diversification of the French Luxury giant.

Responding to notable consensus EPS downward revision for LVMH through 2025, I update my residual earnings valuation model for the company's stock; I now calculate a fair implied share price equal to $146/ share. Downgrade to "Hold".

For context, LVMH stock has under-performed the broad equities market YTD but outperformed most of the company's industry peers in the Luxury consumer goods sector. Since the start of the year, LVMH shares are up about 7% only, compared to a gain of approximately 20% for the S&P 500 ( SP500 ), and a loss of close to 14% for Kering ( OTCPK:PPRUF ), respectively.

Luxury Demand Is Slowing

The first signs of a slowing demand backdrop for luxury goods have already surfaced in Q3 2023 . During the period from June through the end of September, LVMH's topline growth slowed sharply, from 17% YoY in Q2 down to 9% YoY in Q3. As expected, the major growth headwind was coming from Asia, excl. Japan, where growth slowed from 34% to 11%, respectively. Notably, LVMH's topline performance was materially below consensus estimates, missing expectations by close to $700 million according to data compiled by Refinitiv. Now, although LVMH did not disclose earnings for the period, it is likely that profit growth for the conglomerate slowed at a similar pace as revenue -- if not at an even sharper pace, due to the company's strong operating jaws.

Reflecting on the growth slowdown in Q3, it certainly was not helpful for investor confidence that LVMH failed to give a focused, encouraging outlook going into the holiday season, Q4. Commenting on the near-term future, LVMH management simply said :

In an uncertain economic and geopolitical environment, the Group is confident in the continuation of its growth and will maintain a strategy focused on continuously enhancing the desirability of its brands, drawing on the authenticity and quality of its products, excellence in distribution and agile organization.

LVMH will draw on its powerful brands and the talent of its teams to further strengthen its global leadership in the luxury goods market in 2023.

However, the lack of guidance from management certainly did not stop analysts from reading the signs. Below is a chart from Refinitiv, mapping analyst consensus estimates for LVMH's FY 2024 earnings (MC.PA reference, Paris trading for LVMH stock); I point out that projections have consistently been lowered through Q3 and into Q4, now trending about 10% lower at ~€33/ share, compared to ~€36.5/ share estimated three months ago.

A similar pattern is noted for FY 2025 EPS estimates.

On the luxury demand backdrop more specifically, my personal projection would be for a ~5% YoY growth in aggregated Luxury sales for 2024, which would come in about 1-2% below consensus according to brokerage reports released by bulge bracket banks in Q3. My cautious projection is anchored on the worry that macroeconomic challenges may restrict volume growth for luxury demand quite significantly, likely keeping volume flat in 2024 vs. 2023. Meanwhile, I am highly doubtful about the brand's ability to leverage pricing as a means to materialize growth, as price increases are expected to return to historical norms (3-5% YoY growth).

I am also worried about Chinese consumption, which continues to be a pivotal driver for the global luxury market. So far, China's economy has broadly failed to rebound in line with expectations, and the country's macro challenges are likely to persist well into 2024. Meanwhile, indicators such as the PMI and consumer confidence suggest that both Europe and the US could see recession in early 2023, which would certainly be a notable headwind to global luxury demand.

I Lower My Target Price

In line with notable analyst consensus EPS downward revision for LVMH stock through 2025, I update the input for my residual earnings valuation model: I now estimate that LVMH's EPS in 2024 will likely fall within the range of between $7.5 and $7.8 (vs. $8.6 previously). Similarly, I also lower my EPS expectations for 2025 to $8.1 (vs. $8.95 previously). I continue to anchor on a 3% terminal growth rate, as well as on an 8% cost of equity requirement.

On the backdrop of the highlighted EPS downgrades, I now calculate a fair implied stock price of $146.43 for LVMH (LVMUY reference).

Below is also the updated sensitivity table.

Conclusion

While I previously recommended a "Buy" for LVMH shares as a function of the conglomerate's long-term growth outlook, I now become somewhat more bearish on the stock and I downgrade the stock to "Hold", as the near-term outlook has become more challenging than previously expected. Specifically, declining global luxury consumption volume, notably in China, prompts concern, while pricing growth is fading across the globe. The consensus EPS downgrade through 2025 reflects this thesis.

LVMH's Q3 performance signals a slowdown, and with limited growth expectations for 2024 and 2025, the fair implied stock price of $146/share is notably lower than my previous estimate of $191/share."

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