LVMH: Finally At An Attractive Entry Point? (OTCMKTS:LVMHF)

LVMH Moet Hennessy (OTCPK:LVMUY) (OTCPK:LVMHF) has experienced a significant decline over the last six months and is currently down around ~22% in this time frame.

This poses the question if the luxury goods company – which always seems to be on the more expensive side – is finally at a reasonable or even attractive price to initiate a position.

The Business

In the worldwide luxury goods and fashion sector, Moët Hennessy Louis Vuitton SE, or LVMH, is a formidable force. As the industry leader, LVMH has an impressive portfolio that includes a number of well-known brands that are all associated with luxury, style, and innovation. Under the inspirational leadership of Chairman and CEO Bernard Arnault, this powerhouse based in Paris has made a name for itself as a symbol of luxury, constantly pushing the envelope of extravagance without compromising on tradition and quality. The company is the only luxury group that is operating in all of the relevant luxury sectors. Their revenue can be broken down into the following segments:

The company is also geographically well diversified. But the pretty high reliance on the Asian market ~30% could be both, a big growth catalyst as well as a major risk in the future due to potential trade restrictions or an ongoing trade war between Europe/The West and China.

Fundamentals And Outlook

LVMH managed to consistently improve the underlying fundamentals of the company over the last few years.

The margins of the business also improved slightly over the last 10 years.

2020 As An Outlier

The business year of 2020 was a big outlier – both positive and negative for almost all important metrics of LVMH. If we for example take a look at the revenue, we can clearly see a big bump in this time frame. But also the margins took a noticeable hit. This of course makes sense with the Covid-19 pandemic and the implications such a global health and economic crisis causes for the luxury segment. Oddly the EBIAT to FCF metric improved significantly in this time frame. To adjust for these anomalies most of the metrics in our valuation will be without this time frame, to better resemble the real business under normal conditions. But more on that in the valuation.

Asia As A Major Growth Catalyst

LVMH is currently generating around 30% of its revenue in Asia. In 2021, this metric was even higher at ~35%. This market is expected to continue to grow in the next few years in all of LVMH’s business segments.

This is especially the case due to rapid economic expansion, which has decreased poverty throughout Asia and also increased the size and purchasing power of the middle class.

Trade Tensions As A Major Risk

LVMH faces a unique combination of challenges in the Asian market, despite the company’s already dominant market position and the tremendous growth potential in this region. Especially China could pose a risk for the company.

Given the current Trade War and the potential for hostilities to escalate between the Western States and China, a Europe-based company like LVMH may be subject to trade restrictions or other regulatory actions by the Chinese government, as the Chinese government could try to strengthen Chinese alternatives and therefore weaken LVMH and its peers. This could furthermore lead to a change in the purchasing behavior of Chinese consumers’ which might slow growth in Asia or even lead to declining revenue. Customers could, for instance, choose domestic brands over foreign ones, or their perception of Europe-based businesses might deteriorate, which would lead to a decline in business. LVMH should really keep these potential hazards in mind and establish backup strategies to alleviate any adverse effects on their business activities within China.

Valuation

LVMH is currently trading at a PE Ratio of ~22. This seems cheap at first glance compared to the 10-year historical ratio of 27, but if we factor out the unusually high ratios from early 2020 to mid-2021, we arrive at a similar PE Ratio of 22 which suggests the company could be trading right around fair value right now.

Peer-Group-Analysis

If we now take a look at some of LVMH’s major competitors Hermès (OTCPK:HESAY), Compagnie (OTCPK:CFRUY) and Kering (OTCPK:PPRUY) we can first of all see that all companies experienced a similar decline in the last 6 months, with Compagnie and Kering being down even more than LVMH.

Setting the different PE Ratios of the companies side by side, it becomes clear that currently, Hermes seems to be the most expensive one with a massive distance from the other companies, while LVMH has currently the second-highest PE ratio of the selected peer group. The EV/EBITDA shows a similar picture.

Considering a few other valuation methods, the difference between the four companies stays pretty much consistent with a few differences between P/E and PEG for example. Generally speaking and using the here for example P/E the companies could be ranked from the most expensive to the least expensive like that:

1. Hermes – +100%

2. LVMH – base line

3. Compagnie – ~-20%

4. Kering – ~-25%

Looking at the different growth and profitability rates of the companies, the differences in the valuations are starting to make sense. Especially the growth and profitability metrics of Hermes are really impressive. If Hermes however therefore deserves a valuation premium of ~100% over LVMH is another question.

In the comparison with Compagnie and Kering, LVMH is definitely performing the best, justifying the slight valuation premium over the two, in my opinion.

The Quant Factor Analysis comes pretty much to the same conclusion with the following grades for each of the mentioned companies:

At least relative to its major competitors there doesn’t seem to be a massive miss-pricing right now. To evaluate LVMH independently I conducted a Discounted Cash Flow Analysis, which factors in future growth and profitability.

Discounted Cash Flow Analysis

In the Discounted Cash Flow Analysis (DCF) major assumptions I took are the blue cells. The assumptions are also summarized here:

• Revenue Growth Rate: For the revenue growth rate, I assumed a CAGR of 12%. This is pretty much in line with LVMH’s historical growth rates.

Click to enlarge

• EBIT Margin: I averaged out the last two years and assumed that the EBIT Margin would then stay flat at the averaged-out metric of 27%. I didn’t use the 19% of 2020, as this seemed like a negative outlier.
  • Financial Result And Taxes: Here I again averaged out the last two years and therefore used -32% on the EBIT to calculate the net profit. The -44% of 2020 once again seemed like an anomaly.
• Tax Rate: Here I used 17% as this seems like a good average, considering the last few years:

Click to enlarge

• Free Cash Flow: From this point on, I calculated the EBIAT using the tax rate and then attempted to find a useful EBIAT to Free Cash Flow ratio. Taking a look at 2017 to 2022, I averaged out all the years besides 2022 – as this seemed to positive – to get an EBIAT to FCF Ratio of -17%.

Click to enlarge

• WACC: For the WACC I used 9.5%. This is right around LVMH’s current rate.
• Perpetuity Growth Rate: For the perpetuity growth rate I assumed 3.5%. This seems more than reasonable considering the historical growth rates of this market segment.

Conclusion

Our Discounted Cash Flow Analysis gives us a fair value target share price of ~$152, suggesting that the company is pretty much fairly valued right now. Since the individual PE Ratio as well as the Peer Group Analysis gave the same conclusion, I believe that the company is trading at a fair value right now.

Given however the very high quality and the diversified business in a rapidly growing market segment, I nevertheless believe that right now could be a suitable option to open a position in LVMH. I will slowly start to accumulate more at these prices, which is why I rate the company as a ‘Buy’ right now.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.