2023-04-19 07:06:34 ET
Summary
- LVMH has rebounded nearly 70% from its 52-week low.
- The reopening of China should continue to be a strong growth driver, especially as flight capacity starts to ease.
- The company should outperform the broad retail sector during a downturn as it demonstrates great resilience.
- The latest Q1 update was excellent and the current valuation remains discounted compared to other luxury brands.
- I rate the company as a buy.
Investment Thesis
LVMH ( OTCPK:LVMHF ) has been one of the best-performing European companies in the past decade, with shares up over 460% during the period. The company continued to perform exceptionally well in the last few months and is now up nearly 70% since October. I believe LVMH is one of if not the strongest brands in the world and should continue to outperform in the long run.
In the near term, the reopening of China should remain a meaningful growth driver due to increased traveling volume and massive pent-up demand. While the global economy is starting to slow, the company will likely hold up much better thanks to its resistant business nature. The strength is reflected in the company's recent financials update which showed solid growth across the board. The current valuation is also very reasonable with multiples discounted compared to other luxury brands.
China Tailwinds
I believe the reopening of China will continue to be a meaningful growth driver for LVMH in the near term. The country remains crucial for the company as Asia (excluding Japan) is by far its largest market, accounting for 36% of total revenue. Some of its segments such as Selective Retailing also rely heavily on international travel volume, as it owns over 420 duty-free stores across 12 international airports.
While China has announced its reopening for a few months, its outbound travel volume remains constrained due to the bottlenecks in flight capacity, as airline companies were caught off guard. Therefore, there is still a lot of pent-up demand on the sideline waiting to be released. As flight capacity eases in the coming months, the company should see a further boost in demand.
Relative Resilience
The economy has been slowing in the past year and the trend seems to have accelerated in the last few weeks, as most economic indicators came in below expectations. For instance, retail sales in March dropped 1% MoM (month over month), significantly higher than the consensus of 0.4%. While the economy continues to weaken, LVMH's demand should hold up well.
LVMH is one of the most prestigious brands in the world and has an affluent customer base. It is estimated that the company's major target demographic has an annual salary of $75,000 or above, representing a 33%+ premium compared to the US median salary of $56,420 per year. This gives them much stronger purchasing power and a slowdown in the economy may not post much impact on their financials. Their buying habits are also very sticky as the company's strong branding drives customer loyalty.
Not to mention the business is well diversified into multiple segments, which further minimizes the potential risks. I believe LVMH will demonstrate great resilience and outshine the broader retail sector.
Q1 Updates
LVMH recently announced its first-quarter update and the figures are excellent despite facing a slowing economy (it is worth noting that this is just an update, not earnings, therefore no income statement and balance sheet are provided).
The company reported revenue of €21 billion, up 17% YoY (year over year) compared to €18 billion. The growth was mostly led by the Selective Retailing segment, which grew 30% YoY from €3.04 billion to €3.96 billion, representing 18.8% of total revenue. DFS Group (duty-free stores) benefited significantly from the reopening of China and increased travel volume, while Sephora continues to see great momentum with ongoing market share gain.
The Fashion & Leather Goods segment was also strong, with revenue up 18% YoY from €9.12 billion to €10.73 billion, accounting for 51% of total revenue. The growth was very broad-based with brands like Christian Dior, Celine, and Loewe continuing to perform exceptionally well.
The Wine & Spirits segment was the softest, with revenue increasing only 3% YoY from €1.64 billion to €1.69 billion. The demand from China still has not fully recovered to pre-covid levels and the sales of Cognac were pressured by the higher-than-normal inventory levels. Watches & Jewellery and Perfumes & Cosmetics both grew 11% YoY to €2.59 billion and €2.12 billion respectively, mostly driven by Tiffany & Co, Bvlgari, and Christian Dior.
The overall results are very solid with double-digit growth in four out of the five categories. Wine & Spirits were weak but the impact was minimal as it is by far the smallest segment accounting for only 8.1% of total revenue.
Valuation
Although LVMH's share price has rallied substantially, its valuation remains very reasonable in my opinion. The company is currently trading at a PE ratio of 32.6x, which is higher than normal retail companies but very discounted compared to luxury brands. As shown in the chart below, peers such as Hermes ( OTCPK:HESAY ), Estee Lauder ( EL ), and Lululemon ( LULU ) have an average PE ratio of 59.9x, which represent a massive premium of 83.7%. I do not think LVMH should be trading at such a discount as it continues to report excellent results, and its growth rates are also similar to peers. For instance, its revenue growth of 17% in Q1 is in line with the 22% reported by Hermes. As long as the company continues to deliver, I believe its valuation will eventually catch up with peers, which should offer meaningful upside potential.
Investors' Takeaway
Despite the massive rally, I believe LVMH still presents a compelling buying opportunity. The reopening of China should continue to be a tailwind for growth, and demand should hold up relatively well even if we enter an economic downturn. The strength was shown in the recent Q1 update which reported broad-based growth led by Selective Retailing, as international travel volume rebounded. Despite such great fundamentals and financials, the current valuation remains discounted compared to peers. I believe the company should be trading at a multiple in line with peers, which presents great upside potential. Therefore, I rate LVMH as a buy.
For further details see:
LVMH: Still Very Compelling