2023-03-10 16:57:04 ET
Summary
- LVMH is a luxury powerhouse and a multi-decade trendsetter, whose brands are the embodiment of prestige and class.
- The company's pricing power is almost unparalleled, as its customers are high-net-worth men and women who crave LVMH's unique status-signaling products.
- LVMH is one of the least sensitive companies to macroeconomics, thanks to its luxurious offerings in fashion & leather, jewelry & watches, spirits & wines, perfumes & cosmetics, and retail.
- LVMH and its brands seem unstoppable, and I believe 2023 is going to be another great year. Among the near-term catalysts are the reopening in China, the global return to travel, and the Yayoi Kusama collaboration.
- Despite significantly outperforming the market with a 48.3% surge, I rate the stock as a Buy and estimate its fair value at €928 or $977 per LVMHF share.
LVMH Moët Hennessy - Louis Vuitton, Société Européenne ( LVMHF ) (LVMUY) is probably the best company in the world in my personal opinion. After a down year in 2020 due to Covid-19, 2021 & 2022 reflected the company's extraordinary portfolio of prestige brands with almost unparalleled pricing power. As investors are worried about a year of deceleration, I project 2023 will be another strong year for the company, thanks to the China reopening, continued return to travel, and the Yayoi Kusama collaboration. I rate the stock as a Buy, with a fair value of €924 per share, or $971 per LVMHF ADR, reflecting a 14.8% upside compared to the market price at the time of writing.
Company Overview
LVMH operates as a luxury goods company worldwide. The company is comprised of 75 'Houses' of brands with 5,654 stores, rooted in six different sectors - Wines & Spirits, Fashion & Leather Goods, Perfumes & Cosmetics, Watches & Jewelry, Selective Retailing, and Other Activities.
Wines & Spirits at a glance:
The segment includes more than 14 status-signaling brands, which are distributed both via wholesale and directly to at-home and out-of-home consumers. The segment's operating margin is at 30.4%, reflecting the value of its high-end brands like Dom Pérignon and Hennessy.
Fashion & Leather Goods at a glance:
Under Fashion & Leather Goods, each of LVMH's brands has its unique niche and different autonomous management. The group supports their growth by providing them with shared resources, including raw materials, logistics, and business connections. The segment's operating margin amounted to 40.6%, slightly higher than the comparable Hermès' ( HESAY ), which had a operating margin of 40.5% in 2022.
Perfumes & Cosmetics at a glance:
To get a grasp on just how big LVMH is, the group owns a portfolio of world-famous brands, one of which is Fenty Beauty by Rihanna, which turned Rihanna into the richest musician in the world. This is just one brand, and not even the biggest one, of one of the smaller segments in the group. This is a lower-margin segment, with 8.5% margins in 2022.
Watches & Jewelry at a glance:
Similar to its other segments, each brand is managed separately and appeals to a slightly different audience. The segment's operating margin is at 19.1%, slightly higher than the comparable Richemont ( CFRUY ), which had a consolidated operating margin of 19.0% in 2022.
Selective Retailing at a glance:
This is a unique segment in the group, under which the company is focused on aggregating both third-party brands and its own. Sephora is the world leading selective beauty retailer, competing with the likes of Ulta Beauty ( ULTA ). This segment lowers the consolidated margin of the group, showcasing 5.3% operating margins. However, it's likely due for margin expansion as the DFS chain, which is a travel retailer, recovers along with the return to travel and the reopening in China.
The group's Other Activities include hospitality, a radio station, several newspapers including the Le Parisien, and a cruise line.
Overall, the group is extremely diversified both in its product categories and geographically:
While many other companies have shown signs of struggle in 2022, LVMH's revenues increased by 23.3%, and the group kept its all-time-high operating margins of 26.6%. While some investors believe the group is due for a slow 2023 with tough comparisons, I believe it has great tailwinds to support another amazing year.
Is LVMH A Holdings Company?
Some people argue that LVMH, in essence, is a holdings company. Thus, it would be argued, that LVMH should be trading at a discount compared to other pure-play operational luxury companies like Hermès. The market seems to partially agree, as we can certainly see LVMH is much cheaper than Hermès based on any price multiple you look at, and it trades more closely to another supposed holding company in Kering ( PPRUY ) (see additional discussion under the Competitors & Multiples section).
Before we discuss whether LVMH is or isn't a holdings company, first we should answer why would investors even worry about that semantic question. Basically, holding companies carry overhead expenses which are viewed as non-essential to the profit-generating operational businesses it holds. Those expenses usually include the salaries of the holdings company management, offices, etc. All other things equal, a holdings company will generate a lower profit than the sum of all its separate holdings, because the aforementioned expenses will be saved.
In my view, LVMH is definitely a holdings company. As widely known, today's LVMH is comprised of many acquired-along-the-way companies. The head of the group and the world's second-richest man (or first, depending on Tesla's stock price at the time you're reading this article), Mr. Bernard Arnault, is known as a predatorial businessman after taking over huge empires like Christian Dior and LVMH itself.
However, the regular disadvantages of a holdings company are non-existent in LVMH. The group is extremely profitable, and the synergies it has between all its operations are more than offsetting any "unnecessary costs". Besides obvious operational synergies, the combined LVMH group has connections no other company possesses. Just look at some of the names who attended its recent fashion show, and the collaborations with worldwide trendsetters like Pharrell Williams , and Yayoi Kusama . In addition, the group, led by Bernard Arnault, has demonstrated its incomparable ability to acquire huge brands and improve them in the course of just a few years. Most recently, Tiffany & Co. which was acquired in 2021 has seen its sales double already.
So the answer is yes, LVMH is a holdings company but in a very good way.
Unique Leadership Strategy
The Arnault Family fills significant roles in the group. To name a few, Delphine Arnault, Mr. Arnault's daughter, is the CEO of Christian Dior, and Alexandre Arnault, his son, is a leading executive in the group. While it could be argued that family-led businesses are fertile grounds for mischievous activity, I don't think anyone could argue with the group's result. Specifically, operations that were led by an Arnault family member have shown extreme growth performance.
Another unique attribute of the group's leadership structure is the constant changing and switching of roles. Bernard Arnault believes that his leading executives should evolve within the group and change their challenges from time to time:
In a large company, as in any human organization one needs to evolve. It's not a good thing to keep a form of organization that leads to a routine mindset. I think we need to push innovation so that the executives after a certain while, after giving them time to prove their quality to succeed, they must use their management skills by changing. Mustn't get used to things.
--- Bernard Arnault, Chairman and CEO, Q4 Earnings Call
Just two days ago, the company announced a leadership shakeup in its beauty division. In my opinion, this leadership strategy is very unique, and it results in restless ambitious leaders. I strongly advise investors to follow the group's brands on social media, just to get a grasp of how much work is done in the group every week. Non-stop innovation, non-stop marketing events, never-ending collaborations. I have never seen a company so big, so timeless, and successful, yet so ambitious.
Growth Prospects
After a harsh 2020 year for the group as a result of the pandemic, LVMH had two years in a row of extraordinary growth, with revenues almost doubling since 2022, and operating profits almost tripling:
LVMH's 2022 Snapshot
The results of those amazing two years were shown in the stock, which is more than 2.5X higher than its pandemic lows. However, as we all know, the market is forward-looking. The question that arises now is what does the future hold for LVMH, and can the company continue to deliver such tremendous growth numbers.
In my view, even though we will definitely experience a growth deceleration to some degree, there are huge growth opportunities that are yet to materialize. In 2021-2022, the company's growth was essentially a return back to normal after the lockdowns in many regions have been stopped. There weren't any special initiatives or campaigns, just good operations, a good economy, and great implementation of acquired businesses.
2023 is different. First of all, the economy is deteriorating. However, the customer class of LVMH isn't as sensitive to the overall economy, as the group is mostly targeting high-net-worth individuals (extremely high), and in its lower categories like Sephora, the demand is very sticky.
Secondly, LVMH launched a limited-edition campaign with the famous Yayoi Kusama, which has been a huge success:
What counts above all is quality today, products are selling incredibly well. While it's been difficult to find, if today, if you want a yellow Kusama bag, well, it's quite simply out of stock.
--- Bernard Arnault, Chairman and CEO, Q4 Earnings Call
Thirdly, the reopening growth driver, which was demonstrated in 2021-2022, is not at all over, with the return to travel trend still ongoing and the reopening in China. China, one of LVMH's more significant markets, has abandoned its zero Covid-19 policy at the very end of 2022, and the effect on the company's results should be reflected in 2023.
Overall, I believe 2023 is going to be another great year for the company. I am more than confident that the current consensus estimates for the year - €85.2B in revenues (7.0% growth) and €31.9 EPS (14.0% growth) are going to be significantly beaten.
Competitors & Multiples
The competitors list for LVMH isn't a long one. Each of its segments sees different kinds of competitors, like Sephora and Ulta Beauty, or the Wines & Spirits segment which competes with companies like Diageo ( DEO ). However, LVMH as a group and its core activities are mainly comparable to four other public companies which are Hermès, Kering, Richemont, and Burberry ( BURBY ).
Created by author using data from Seeking Alpha. Data as of March 9th, 2023
The only company in the peer group that outperformed LVMH in the past 10 years is Hermès. LVMH's total return is 237 points higher than the peer average, and its dividend growth of 22.13% is industry-leading along with Kering.
Created by author using data from Seeking Alpha. Data as of March 9th, 2023
LVMH comes a close second to the much smaller Hermès in profit growth as well. Hermès is only 14.0% the size of LVMH in terms of revenue, which speaks loudly to the impressive growth numbers of LVMH. As we can see, the group outperformed its peers' average on every metric. As Burberry is dragging the average down, it should be noted that LVMH has outperformed or has come very close to the average excluding Burberry.
Created by author using data from Seeking Alpha. Data as of March 9th, 2023
When we're looking at the consolidated numbers, it's important to remember LVMH is much more diversified than its peer group, with some of its businesses being low-margin ones. Looking at the per-segment numbers, the Fashion & Leather Goods segment, which is comparable to Hermès, Kering, and Burberry, has brought in EBIT margins of 40.6%, which is the highest in the group. This reflects the benefits of the LVMH group structure and the value of its brands. The Watches & Jewelry segment, which is comparable to Richemont, had operating margins of 19.1%, again the "holdings" company was able to beat the more focused concentrated peer.
Created by author using data from Seeking Alpha. Data as of March 9th, 2023
Putting all the numbers together, I'm surprised LVMH is trading at the median multiple and below the peers' average. The company has shown it can compete with the best of them in their specific categories in terms of margins, and has demonstrated peer-leading growth even though it's much bigger than its competitors. Looking at the multiples, I find LVMH to be slightly undervalued and believe it should be trading at a forward P/E multiple which is closer to 30.0.
Valuation & Near-Term Projections
I used a discounted cash flow methodology to evaluate LVMH's fair value. I forecast LVMH will grow revenues at a 9.3% CAGR between 2022-2028, which is higher than the consensus of approximately 7.0% growth, but below the company's past 7-year CAGR of 13.2%. I estimate revenues will grow at this pace due to constant price increases, continued store openings, new acquisitions, recovery in the lagging businesses, and steady organic growth.
I project EBITDA margins will increase incrementally up to 31.1% in 2028. In my view, this is a conservative projection as the company already surpassed this number in 2021 and it's still in the ramp-up stage of some of its businesses. Plus, LVMH provided a 30.7% EBITDA margin in 2022 despite some headwinds. Its travel retail business in DFS has yet to recover, and China was in lockdown for the majority of the year. In addition, there was significant cost inflation in 2022 and some of the company's businesses with lower pricing power, like Sephora, will see margins increase as inflation eases.
Overall, I strongly believe there's room for additional upside.
Created and calculated by author using data from LVMH's financial reports and author's projections
Taking a WACC of 7.6%, I estimate LVMH's fair value at €924 per share, which equals to $971 per share of the company's ADR based on the current USD/EUR ratio. This represents a 14.8% upside compared to the market price at the time of writing. While this does represent an arguably high forward P/E ratio of 28.5, the E in the equation is expected to increase significantly in the upcoming years and the multiple is pretty much in line with the company's historical median. Additionally, I estimate 2023 will prove that LVMH isn't slowing down, which would result in a much-deserved multiple expansion. I don't expect LVMH's multiples to expand to Hermès' level, but I do think it should trade at a slight premium compared to its other peers.
It could take time for the stock to reach my price target, as dark macro headlines overshadow the market. However, I believe now is a good time to buy LVMH and hold it forever, as its brands are timeless, there are plenty of growth prospects in the near term, and I estimate the stock is undervalued. Assigning a 24.0 exit P/E multiple for my estimated 2025 EPS of 39.04, I forecast the stock price to be at €937 in two years, reflecting 10.1% annual return in the near term.
Near-Term Projections
I find it important to provide additional details regarding my near-term financial projections in order to provide both the readers and myself with the ability to measure the accuracy of the investment thesis. This allows me to easily assess whether an earnings report is good or bad, and what adjustments I have to make in my model.
For the first half of 2023, I forecast LVMH will report €40.4B in sales, €12.9B in EBITDA, and €7.4B in net income. For the full year, I expect €89.3B in sales which is above the consensus of €85.2B, and €32.5 EPS, which is above the consensus of €31.9. After the April revenue release, we'll see if the company is on pace to meet my expectations, and I'll adapt my model accordingly.
Overall, I expect 2023 to be a great year for LVMH, and the year has begun with a great start:
So for 2023, I'm quite confident. I think that 2023, if the early part of the year is confirmed, if the opening up of China is confirmed, it's a bit short, but a very strong start. We can't guarantee it's going to continue like that. We can't guarantee that something might not happen. We hadn't expected the Ukraine problem two years ago. If it continues as it is, it'll be an excellent year. We'll be able to continue to develop our investments, and gain market share.
--- Bernard Arnault, Chairman and CEO, Q4 Earnings Call
Risks
I feel no need to address in detail risks that apply to the entire market and aren't specific to LVMH. In short, if the world does go into a recession, LVMH should perform better than most companies, as its higher class of customers is less sensitive to the overall economy.
Regarding China, the risks are two-fold. First, if there's a sudden revert to strict Covid-19 policies, then the company's results for 2023 would suffer. However, it should be noted that for the majority of 2022, China was under lockdowns and the company's results were tremendous. Second, market participants expressed worries that the return of Chinese tourism will drive more density in LVMH's physical stores worldwide, which in turn could affect the overall customer experience. Generally, the stores have all seen immense same-store-sales growth in the last two years (the company doesn't provide the number, but it can be inferred from the number of new stores relative to the growth in revenues in the relevant segments). I trust the company's ability to provide customers with the experience they expect, as it did in the past. The return of global tourism is essentially just a return back to normal.
Well, China, it's actually difficult to predict what's going to happen. What we can say about China is China needs economic growth. In fact, it started in January. We have every reason to [be] confident [and] optimistic on the Chinese market. In Macau, where Chinese can now travel to, the change is quite spectacular. The stores are full. It's really come back [at a] very strong pace.
We have various stores, different size stores and increasingly, we have stores that are reserved for the customers who require greater individuality of high quality and we've managed -- although the brand does indeed attract huge [amounts of customers], we've managed to improve the desirability. That’s our key criterion, the brand desirability every quarter.
--- Bernard Arnault, Chairman and CEO, Q4 Earnings Call
The most obvious and common risk associated with LVMH is the retirement of Mr. Bernard Arnault. Very similar to Warren Buffet and Charlie Munger at Berkshire Hathaway ( BRK.A ) (BRK.B), the success of LVMH is attributed, and rightfully so, to its long-time leader. Well, when he's enquired about his retirement, Mr. Arnault usually jokes around and shows no sign of a desire to leave:
I [am] friend[s] with Roger Federer and a great fan of tennis. He probably wants me to play a bit more tennis. And the last time I played with Roger Federer, I think I won one point in a single set, and maybe I could do a bit better than that. And that would indeed delight me. But as to succession, you may also have noticed that the retirement age has been extended.
--- Bernard Arnault, Chairman and CEO, Q4 Earnings Call
On a more serious note, while I do believe losing Mr. Arnault as its leader would hurt LVMH to a certain extent, I believe the group has great managers overseeing each of its unique operations. Mr. Arnault's successor, whoever it may be, will be rooted in the LVMH group and deeply aligned with the interests of its investors. Regarding future M&A, although Bernard Arnault's business skills can't be replaced, the entire M&A system of LVMH, including the evaluation of a certain prospect's potential, the negotiation capabilities and methods, and the proven implementation processes within the group, would likely all remain intact.
Conclusion
I strongly believe LVMH is one of the best companies in the world. Sticky never-ending demand, unparalleled pricing power, huge growth prospects, amazing management, incomparably unique brand portfolio, and geographic diversification. LVMH has it all. When evaluating such a high-quality company, I believe a shallow look at its P/E could badly mislead investors. LVMH has proved its brands are timeless and demonstrated its resiliency in tough economic environments. I project 2023 will be another strong year for the company, thanks to the China reopening, the continued recovery in travel, and its limited-edition Yayoi Kusama collaboration. Overall, I expect the company will beat consensus estimates by a decent margin once again. Thus, I rate the stock as a Buy, with a fair value of €924 per share, or $971 per ADR.
For further details see:
LVMH: 2023 Should Be Another Stellar Year, It's A Buy