Moet Hennessy Louis Vuitton is the largest luxury company in the world, owning 75 brands across various segments. A company that sells high-end, premium goods that are considered non-essential may not seem like a good idea, but LVMH's products have consistently been desirable among consumers. This is why the company has achieved an organic growth rate of a 9,1% CAGR over the past 35 years. Is it still a good idea to invest in LVMH? At what price? This is what I am going to investigate in this analysis.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since attending the workshop with Phil Town, I have decided to make some changes to the layout of my analyses. I will perform additional calculations and also provide a brief explanation of why the company is significant to me. If you want to learn more about my company evaluation process, please visit the "MY STRATEGY" section on my website.7
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do own shares in LVMH. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to accomplish this can be found here. LVMH currently represents 1,34% of my portfolio, making it a relatively small position. If you want to purchase shares (or fractional shares) of LVMH, you can do so through eToro. eToro is a highly user-friendly platform that enables you to start investing with as little as $100.
Moët Hennessy Louis Vuitton is the largest luxury company in the world. While many of its brands are centuries old, the current company was formed in 1987 following the merger between Louis Vuitton and Moët Hennessy. The company is headquartered in Paris, France. The company owns 75 brands, which it refers to as "Maisons." These "Maisons" have their own CEO, which makes the company highly decentralized. LVMH operates in five different segments: Fashion and Leather goods, Selective retailing and other activities, Watches and Jewelry, Perfumes and Cosmetics, and Wines and Spirits. Fashion and leather goods is the largest segment, generating 49% of the revenue. Some of the most well-known brands in this segment are Louis Vuitton, Christian Dior, and Kenzo. Selective retailing and other activities generate 21% of the revenue. The most well-known brands in this segment are the beauty retailer Sephora, Les Echos (comprising leading French business and cultural news publications), Royal Van Lent (the builder of high-end yachts marketed under the brand name Feadship), and the hotels Cheval Blanc and Belmond. Watches and jewelry generate 13% of the revenue. The most well-known brands in the Watches and Jewelry segment are Tiffany & Co, Bulgari, and Tag Heuer. Perfumes and cosmetics generate 9% of the revenue. Some of the most well-known brands in the Perfumes and cosmetics segment are Givenchy, Guerlain, and Acqua di Parma. Wine and spirits generate 8% of the revenue. Some of the most well-known brands in the Wine and Spirits segment are Moët & Chandon, Dom Pérignon, Hennessy, and Ardbeg. LVMH's largest market is Asia, which contributes 38% of revenue, followed by the United States (25%), Europe (25%), and other markets (12%). LVMH has a moat through its brands. Some of these brands are centuries old and have built brand recognition over time. This means that customers trust these brands and are willing to pay a premium price for them.
The CEO is Bernard Arnault. He joined the Financière Agache holding company in 1984, which, among other things, owned Christian Dior. He returned the group to profitability by implementing a strategy to develop the world's leading luxury products company. In the process, he reinvigorated Christian Dior as the cornerstone of the new organization. In 1987, he established LVMH after the merger of Louis Vuitton and Moët Hennessy. Bernard Arnault became the majority shareholder of LVMH in 1989 and has been the Chairman and CEO of the company since then. Bernard Arnault began his professional career that year as an engineer with the Ferret-Savinel construction company and was successively promoted to various executive management positions before becoming Chairman in 1978. Bernard Arnault runs a decentralized organization that encourages entrepreneurship. As the CEO of each "Maison" manages daily operations without much interference from Bernard Arnault, this approach is similar to how Warren Buffett runs Berkshire Hathaway. As Bernard Arnault is the CEO, Chairman, and majority shareholder, he can focus on the long-term outlook. This was exemplified in an earnings call where he stated that he doesn't want to rush growth. He mentioned that achieving 8% to 10% growth a year is sufficient because he aims to enhance the desirability of the brand rather than pursuing rapid growth, as this strategy should lead to better long-term growth. Usually, CEOs want to deliver rapid growth to satisfy analysts and bonus packages, but Bernard Arnault is different. It is something that I really like as an investor because he embodies the qualities of some of the best-performing CEOs in history, as discussed in the book "The Outsiders" by William Thorndike Jr. Thus, I am very confident in Bernard Arnault leading LVMH.
I have determined that LVMH has a moat. And I feel very confident about management as well. Now, let us analyze the numbers to determine if LVMH meets our criteria for possessing a strong competitive advantage. In case you want an explanation of what the numbers represent, you can refer to "MY STRATEGY" on the website.
The first metric we will investigate is the return on invested capital, also known as ROIC. We require a 10-year history with all figures exceeding 10% for each year. LVMH has historically delivered a high Return on Invested Capital (ROIC), with it being above 10% in nine out of the past ten years. The company only recorded a ROIC below 10% during the pandemic in 2020. It is encouraging that LVMH has achieved its highest Return on Invested Capital (ROIC) in the past two years, which bodes well for the future. ROIC decreased slightly in 2023, but it does not concern me as it is still higher than it has been in eight of the past ten years. I believe these numbers show that LVMH is a quality company as it consistently delivers a high ROIC.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. I don't have the growth rate from 2013 to 2014 as Finbox only provides data for the past ten years. LVMH has managed to increase its equity every year over the past ten years, which is very impressive. LVMH even managed to modestly increase its equity during the pandemic. It is also impressive that LVMH has increased its equity by more than 10% every year in the past six years, except during the pandemic. Only a few companies manage to increase their equity every year, which is another sign of the quality of LVMH.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. LVMH has managed to grow its free cash flow from 2.837 in 2014 to 11.593 in 2023, which is at a compound annual growth rate (CAGR) of more than 15%, which is impressive. Free cash flow has decreased in the past two years due to the impact of macroeconomic factors. It isn't concerning, but I would like to see LVMH increasing its free cash flow in 2024. LVMH experienced a high levered free cash flow margin post-pandemic as stimulus money boosted the demand for LVMH products. The levered free cash flow margin has decreased since its peak in 2021, which is natural. However, I find it slightly concerning that the levered free cash flow margin in 2023 was lower than it was pre-pandemic in 2019. Year 2023 was challenging for many companies, but I would like to see the levered free cash flow margin increase in 2024. Free cash flow yield is at its second lowest level in the past ten years, which could indicate that the shares are not trading at a cheap valuation. However, we will revisit this later in the analysis.
Another important aspect to consider is debt. It is crucial to assess whether a business has a manageable level of debt that can be repaid within a period of 3 years. We do this by dividing the total long-term debt by earnings. After analyzing LVMH's financial statements, I have concluded that the company is debt-free. I like companies with no debt. Thus, this is another positive sign for LVMH.
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Based on my findings so far, I believe that LVMH is an intriguing company. However, no investment is without risk, and LVMH also has its fair share of risks. Macroeconomics. The luxury sector is sensitive to economic cycles, and a downturn can significantly impact consumer spending on high-end goods. Furthermore, geopolitical tensions and currency fluctuations can adversely affect the company's international revenues. Management has mentioned that in 2023, the economic and geopolitical context was rather uncertain due to various conflicts worldwide, along with inflation and rising interest rates. These macroeconomic factors affected LVMH, which is particularly evident when looking at free cash flow. Both free cash flow and the levered free cash flow margin decreased, resulting in the levered free cash flow margin being lower than it was before the pandemic. If these macroeconomic events continue, they will affect the results of LVMH. Competition. LVMH faces stiff competition from other large luxury conglomerates such as Kering and Richemont, which possess substantial resources, strong brand portfolios, and significant market influence. For instance, in an earnings call, Bernard Arnault mentioned that Richemont owns two brands (Cartier and Van Cleef) that are considered among the top eight luxury brands. LVMH also faces competition from independent luxury brands such as Hermès and Chanel, which Bernard Arnault also mentioned as some of the top eight luxury brands. Furthermore, the luxury market continually sees new entrants that bring fresh designs, innovative marketing strategies, and a strong digital presence. This indicates that these new entrants have the potential to attract younger, fashion-forward consumers. Counterfeiting goods. LVMH mentions that they have a zero-tolerance policy to counterfeiting goods. LVMH emphasizes that preserving the creativity and rights of designers, artists, and brands is crucial for long-term survival. One of the biggest threats to survival today is counterfeit goods. LVMH has faced counterfeiting since the earliest days of its success, and it is an ongoing risk. This risk has increased with the emergence of social media platforms such as TikTok, which target the younger generation of shoppers who do not mind owning counterfeit products. Counterfeiting goods negatively impacts LVMH in various ways. Every counterfeit sale represents a lost opportunity for the brand to sell authentic products. Additionally, counterfeit goods saturating the market may diminish the demand for genuine products.
There are also numerous reasons to invest in LVMH. One reason is the favorable market conditions for the luxury sector. There are various favorable factors supporting the sector. One reason is that customers start buying luxury goods at a younger age. Data from the U.S. indicates that Millennials earn similar incomes to their parents at ages 25 to 34, but have significantly less savings than previous generations, suggesting a "you-only-live-once" mentality. Data also suggests that the youngest generation (Generation Z) starts buying luxury items three to five years earlier than the Millennials did. These generational factors could significantly contribute to the industry's growth over the next decade. We don't have numbers from Europe, but I suppose it follows the same pattern. Another tailwind for the luxury sector is the global growth of the middle class. By 2030, another 700 million people are expected to join the global middle class, comprising more than half of the world's total population. The middle class is already the largest spending group in the world. In 2020, the global middle class spent $44 trillion, which accounted for 68% of the world's consumer spending. By 2030, middle-class households are expected to spend even more, an estimated $62 trillion, which is 50% higher than in 2020. Thus, a growing middle class and purchasing luxury goods at a younger age are favorable conditions for the luxury sector. Acquisitions. LVMH has achieved consistent growth through both organic means and acquisitions. Growing through acquisitions is an exceptionally challenging strategy to consistently outperform, as evidenced by the well-known statistic that 70-90% of acquisitions fail. LVMH has a track record of acquiring strong brands or creating new ones, and optimizing them by leveraging group insights in marketing, distribution, and other key areas. LVMH has demonstrated its capability to reinvest its capital efficiently and profitably in this manner. One example of a great acquisition is Tiffany & Co, which LVMH acquired in 2021. Since LVMH acquired Tiffany & Co., they have managed to triple the operating income of the company. If LVMH is as successful with future acquisitions, it could result in continuous growth. Outperforming the industry. According to Bain & Company, the global personal luxury goods market has grown by 6% annually (CAGR) from 1996 to 2022. LVMH has fared even better than the market as a whole when looking at revenue. Over the past 20 years, the company has achieved a revenue compound annual growth rate (CAGR) of 10%. LVMH also outperforms the market during challenging times. During the financial crisis, LVMH experienced a 1% decline in sales, outperforming the luxury market by 7%. During the COVID-19 pandemic, the company experienced a 17% decline, once again outperforming the luxury market by 5%. In both instances, LVMH's revenue recovered quickly. Thus, LVMH seems to be one of the better companies in the sector.
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Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 30,33, which is from 2023. I have selected a projected future EPS growth rate of 9%. Finbox expects EPS to grow by 8,4% in the next five years, but management anticipates growth between 8% and 10%. Additionally, I have selected a projected future P/E ratio of 18, which is twice the growth rate. This decision is based on LVMH's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be €319,47. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy LVMH at a price of €159,74 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 18.400, and capital expenditures were 6.800. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 4.760 in our calculations. The tax provision was 5.673. We have 499,4 outstanding shares. Hence, the calculation will be as follows: (18.400 – 4.760 + 5.673) / 499,4 x 10 = €386,72 in Ten Cap price.
The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With LVMH's Free Cash Flow Per Share at €23,21 and a growth rate of 9%, if you want to recoup your investment in 8 years, the Payback Time price is €279,01.
I find LVMH to be an intriguing company, and I particularly admire the exceptional management. LVMH has a strong moat as some of its brands have been around for centuries, which means that consumers have trusted these brands for generations. LVMH has consistently delivered a high Return on Invested Capital (ROIC), which is a good indicator of the quality of a company. Free cash flow and levered free cash flow margin decreased in 2023, which is slightly concerning. However, the decrease is due to macroeconomic factors that have affected LVMH in the past couple of years. Macroeconomics will eventually improve. Thus, I believe that this risk is short to mid-term. Competition is also a risk for LVMH due to its strong competitors, as acknowledged by Bernard Arnault during an earnings call. However, he also believes that LVMH owns four of the eight best brands (Louis Vuitton, Christian Dior, Tiffany & Co, and Bulgari), which means he believes they can compete with the top companies. However, I believe that new entrants may be able to attract younger, fashion-forward consumers. Counterfeiting goods has always been a risk and will likely persist indefinitely. However, as long as LVMH can minimize its impact, it should not significantly affect the business. LVMH should benefit from consumers purchasing luxury goods at a younger age and from the expanding middle class globally. These trends are anticipated to persist for decades. LVMH has been very successful with acquisitions in the past, and acquisitions will also play a significant role for the company in the future, which should lead to growth. LVMH is one of the top companies in the industry as it outperforms the industry in both good and bad times. I really like LVMH, and I believe it could be a long-term compounder. I believe that buying shares below €772, which is the intrinsic value of the Ten Cap calculation, would be beneficial for any long-term investors.
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