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Buy into LVMH excellence

The luxury conglomerate continues to fire on all cylinders
November 16, 2017

The world of luxury retail is enjoying a bumper year thanks to the relative strength of the US dollar against global currencies and strong demand from well-heeled international shoppers. In our view, the premium demanded for shares in Paris-listed luxury conglomerate LVMH (FR:MC.) is justified when compared with the peer group, and especially London-listed rivals. Indeed, Burberry (BRBY) is bogged down in a managerial and strategic quagmire after chief designer Christopher Bailey announced plans to leave the brand, while Mulberry’s (MUL) valuation remains prohibitive for new investors. Jimmy Choo (CHOO) is also in the middle of a complex takeover process by US group Michael Kors (US:KORS). Crucially, these businesses remain single-brand, whereas LVMH owns brands spanning several luxury product categories – thus insulating it from volatility created by short-term trends in any one market.

IC TIP: Buy at 245€
Tip style
Growth
Risk rating
Medium
Timescale
Medium Term
Bull points

Diverse brand portfolio

Strong third quarter growth

Falling net debt

New products well received

Bear points

Drinks supply constraints

Premium rating

LVMH revealed strong 12 per cent sales growth for the third quarter, comfortably beating consensus expectations of 9 per cent and outperforming market expectations in pretty much every division. The exception was wine and spirits, where supply constraints held back growth. We feel LVMH can be forgiven for this as the performance was in line with previous guidance and forecasting the demand high-end tipples such as cognac is challenging due to the long lead time associated with ageing the colourless fruit brandy Eau-de-Vie.

Elsewhere, fashion and leather goods – the division that accounts for the lion’s share of group earnings grew sales by 13 per cent (versus a 9 per cent estimate), supported by the launch of the first Louis Vuitton smart watch, development of the distribution network and the consolidation of the additional stake taken in Parisian couture house Christian Dior earlier this year. Perfumes and cosmetics was the clear outperformer, growing sales 17 per cent (versus a 9 per cent estimate) due to the continued success of the J'adore, Sauvage and Miss Dior perfumes. Several other products were cited as drivers for the strong results, including Rouge Dior lipstick, Mon Guerlain fragrance, Givenchy make-up, and the recent launch of Fenty Beauty, a new make-up range by popstar Rihanna. Watches and jewellery grew 14 per cent, thanks to the popularity of Bvlgari's signature jewellery collections and the launch of the new Festa high-end jewellery line. In watches, TAG Heuer and Hublot continued to grow following new product launches, bucking wider industry trends for this product category.

These top-line numbers illustrate how well diversified LVMH is as a luxury conglomerate. Profitability is improving, too, with first-half operating margins up 1 percentage point to 18.5 per cent, while the group’s share of net profits improved by a quarter to €2.1bn (£1.9bn). The group also declared a half-year dividend worth €1.6, supported by a 23 per cent rise in adjusted cash generation to €4.5bn. Strong cash generation is keeping LVMH’s debt pile in check, too – at the halfway stage the net total fell by a quarter. Leverage has never been too onerous for the company (it’s steadily fallen below one times cash profits), but analysts have expressed concerns that acquisitions are weighing on return on capital employed. In our view, as long as costs keep falling and sales accelerate hereafter, such worries should abate over time.

Specific targets aren’t exactly LVMH’s style. But it wants to continue growing market share via new product launches in new markets. At the last count, sales were strong across Europe, Asia and the United States.

LVMH (FR:MC.)    
ORD PRICE:€245MARKET VALUE:€124bn
TOUCH:€244.9-€24512-MONTH HIGH:€261LOW: €162
FORWARD DIVIDEND YIELD:2%FORWARD PE RATIO:23
NET ASSET VALUE:5295¢*NET DEBT:14%
Year to 31 DecTurnover (€bn)Pre-tax profit (€m)Earnings per share (€)Dividend per share (€)
201430.68.411.33.2
201535.76.07.13.6
201637.66.57.94.0
2017**41.87.79.54.4
2018**44.38.510.54.9
% change+6+10+11+11
Normal market size:150   
Beta:0.90   
*Includes intangible assets of €25bn, or 4,935¢ a share
**JPMorgan forecasts