2023-04-08 08:23:12 ET
Summary
- A really strong year in 2022 due to the execution of the management led to a sharp increase in the share price.
- Their world-class portfolio, combined with ROIC, should drive shareholder returns in the future.
- But for me personally, a lower price would be a better entry point to have a margin of safety.
Thesis
LVMH (LVMUY) is a high-quality company with an outstanding track record that is now at an all-time high. There is no question that they really know how to do business in the luxury industry. So the big question is, when is the right time to buy shares in this company? And for me personally, it is not the time to start a new position. But it is also not the time to sell. In fact, selling LVMH would have been a big mistake in the past and could be in the future. Let me explain my position in more detail in the next paragraphs.
Analysis
LVMH once again posted fantastic results despite 2022 being a rather challenging environment for most companies and individuals. They achieved strong double-digit sales growth at a time when many predicted that rising interest rates and inflation would hurt the luxury sector. But LVMH and the other major players in the sector showed that this was not the case.
It is definitely true that low interest rates have led people to buy more luxury, but I also think that social media has influenced young people to buy luxury a lot. In my opinion, 10 years ago, people did not try as hard as they do today to show off their money and to impress other people.
Their once strongest market, Asia, has dropped off a bit due to COVID, but with the reopening of China, their sales should improve quite dramatically. Europe & France on the other hand improved due to the exchange rates, many people bought the luxury items during the holidays as they were able to get a better price.
But I think the current share price is pricing in some optimism about the reopening of China. And I think there is also the possibility that economic difficulties could increase because inflation is not under control at the moment. Luxury has been untouched so far, but that could change in the future. So buying LVMH shares at an all-time high is always a risk.
LVMH Investor Presentation
Revenues are not evenly distributed between the groups as Fashion & Leather Goods accounts for almost 50% of revenues and even in this segment LV posted 20b in revenues which is 1/4 of LVMH's total revenues. But it is nice for them because this segment has the best operating margins by far.
Fashion & Leather Goods: 40,9% Wine & Spirits: 30,4% Watches & Jewelry: 19,1% Perfumes: 8,5% Retailing: 5,3%
If we take a closer look at these segments, which have 75 different brands between them, we can value their assets. I would also like to add that management has chosen its assets wisely, as they have nice synergies.
In the fashion and leather segment, they probably have the best portfolio of any competitor. They have the established brands like Louis Vuitton or Dior, but they also have some more modern and trendy brands. They also do a good job of setting new trends and choosing the right designers.
If we take a look at the top clubs in the world and the bottle races that take place there, we can also see that Moet and Dom Perignon are the top choices. Only in the vodka department is Grey Goose somehow more popular than LVMH's Belvedere brand, according to my observations. Nevertheless, their wines and spirits are also top of the class.
One segment where I think they are not world class is watches. So they have some nice brands with Hublot and Tag Heuer, but they are probably not in the same league as Rolex, Patek, Audemars or Cartier in terms of prestige. But they have done an excellent job with their acquisition of Tiffanys and there are rumors that they want to buy Richemont (CFRHF) with their core asset Cartier. This would dramatically improve their watch and jewelry division.
In terms of fragrances, they have the world's leading fragrance in 2022 with Dior Sauvage, and one of the most hyped products at the moment with Maison Francis Kurkdjian and the Bacarat Rouge line.
So all in all, they have a nice diversified portfolio that caters to different consumer segments. But with some improvements in their watch and jewelry brands, they could really improve their portfolio even more. But I am quite sure that they are trying to find brands that would improve their portfolio and they are probably working on it right now. I think a possible acquisition of Cartier would be really value adding, as they have shown with Tiffany's that they are able to improve even good brands.
So we know that LVMH is a high quality company with a fabulous portfolio of brands. Their ROIC of 15% over the last 5 years also confirms this. The big question now is whether the company is also cheap or whether we are paying a bit too much for it. And if we take a look at the EV/EBIT graph over the last few years, we see that it is currently more expensive than average.
The sharp rise in the share price in recent months has played a major role in this. And with an EV / EBIT of 22, they are quite expensive. Personally, I would like to wait and build a new position when the ratio goes back to around 15 or below. That should be a good price for such a high quality company.
The shares outstanding over the last few years have been relatively stable, but on March 1 they released a press where they could buy back shares for 1.5b until July 2023 . They also pay a dividend to return cash to their shareholders and they have a very good dividend growth rate of 19% over the last 5 years. Their FCF of 10 billion is also perfectly positioned to fund new acquisitions or return cash to shareholders through buybacks and dividends in the future.
If you look at LVMH and its peers, they all have expensive valuations right now because the gross margins and operating margins in this industry are really high and luxury has been a good business for a long time. With Kering (PPRUF), Richemont and Moncler (MONRF), I have also analyzed the competition in the last few days.
They all have a nice pile of cash and good FCF numbers. LVMH, on the other hand, has a lot more debt, but they are also a lot bigger and if we look at the total debt to equity ratio and the FCF, there is not much to worry about at the moment.
LVMH Investor Presentation
Since the Arnault Group holds 48% of the shares, the shareholders' interest should be in line with the Arnault Group's interest. And I personally rate Mr. Arnault's management skills highly, so LVMH could be like the luxury version of Berkshire that really makes shareholders happy over the long term.
Conclusion
As you have seen in the last few paragraphs, LVMH is a high quality company that is unfortunately a bit expensive. In addition, it will be interesting to see if they can maintain their sales growth rates and how markets like China and India will develop in the future. Will they like the European luxury companies or will there be some big Indian or Chinese competitors in 10 to 15 years? Will there come a time when price increases are too much and they need to increase volume? And how will that affect revenues, because scarcity is an important part for luxury buyers.
Will Christian Dior (CHDRF) be the better buy or LVMH? With Christian Dior you get a 'holding discount' but in Europe there are many companies that have such a construct and people are waiting a long time for the gap to close in companies like Prosus (PROSY) or Porsche (POAHY). When and if this gap will close is not clear but because of the discount, Christian Dior has a slightly higher dividend yield at the moment.
So all in all I would hold if you are a shareholder at the moment and for starting a new position I would wait for the share price to drop a little bit. As we know the stock market, there is a good chance that there will be a better entry point in the future when due to whatever reason the share price is temporarily depressed.
For further details see:
LVMH: The Berkshire Of Luxury