The world largest luxury-goods maker climbing the tops
There are around ten holding giants right now, amongst them, Nestlé, L’Oréal, Berkshire Hathaway, Porsche Automobil Holding SE, Tencent, and LVMH whose recent operational and stock price performance really caught my eye. Of that illustre group, LVMH has been the most spectacular one.
As Warren Buffet says, time works against mediocre companies but favors wonderful businesses. And indeed, the French luxury giant builds an economic moat that gets more and more powerful year by year. LVMH has shown an amazing growth story. Organically and especially through acquisitions.
Let’s have a brief overview of the history of the conglomerate LVMH, which stands for Louis Vuitton Hennessey Moët. Interestingly, the history of LVMH has quite a lot in common with PepsiCo, which is a true diversification and acquisition success story.
The origins of LVMH as a company go back to 1987 through the merger of the fashion house Louis Vuitton and with Moët Hennessy. We all know the expensive handbags of Louis Vuitton which still are the most popular and most margin rich products of today’s conglomerate. Louis Vuitton has a long history itself, having been founded in 1854. The merger of a fashion house with champagne and cognac producer Moët Hennessey in 1987 is an interesting one. And it makes a lot of sense, expensive bags, cognac and champagne are products consumed by the affluent. The combined company significantly broadened its product and service offerings.
Here again, it reminds the diversification history of Pepsi Cola which in the early sixties expanded its product lines with the creation of DIET PEPSI and acquired Mountain Dew. Between the seventies and nineties, PepsiCo expanded its range with bolt-on acquisitions outside carbonate beverages and entered the restaurant business and in 2001, PepsiCo merged with Oaker Oats and became a major player in the breakfast business and a major competitor of companies like Kellog and General Mills.
Now back to the history of LVMH. Through its high margin products and consequently strong cash generation, the company took advantage of market opportunities and over the years acquired almost 100 businesses in the luxury sector. Today, LVMH controls around 60 subsidiaries and 75 prestigious brands, including:
- Christian Dior
- Louis Vuitton
The subsidiaries are often managed independently and are structure into the following six segments:
- Fashion Group
- Wines and Spirits
- Perfumes and Cosmetics
- Watches and Jewelry
- Selective Distribution, and
- Other Activities.
You can immediately see how extremely diversified that company is. It’s like the Nestlé or the PepsiCo of Luxury.
I mean, even if you combined Swiss luxury watch company Richemont (with brands like IWC, Cartier, Dunhill, Montblanc, Piaget, etc.) and spirit giant Pernod Ricard (Absolut Vidka, Havana Club, Malibu, Martell, etc.) you would still not have the broad product and service range of LVMH.
And LVMH doesn’t stop there, the conglomerate completed the purchase of US jewelry company Tiffany in January 2021 which gives the group an even stronger global footprint. It’s intriguing, that LVMH prepared that acquisition in 2020, in the midst of the COVID-19 pandemic when the world was literally in lockdown and the luxury consumption consequently was brought to a halt for months.
Why investors should have the LVMH stock on their watchlist
A lot of LVMH’s success goes to the account of its chief executive and main shareholder Arnault Bernard who has surpassed Amazon founder Jeff Bezos in net worth.
Arnault was the architect of the acquisitions of the last decades and very diligently and prudently manages the French luxury giant. Listening to conference calls is extremely interesting, like Jeff Bezos always puts the client in the center of all operations, so does Arnault, always balancing extreme growth opportunities with brand protection. I mean its’s very obvious: a handbag from Louis Vuitton costs around USD 3’000. You could easily double sales by just reducing the price by about 10 %. But over the long term, this would damage the brand. Or you could boost sales on the internet and multiply profits, but here again, this would harm the image and brand power of the company. It’s exactly the same thing when you look at Ferrari.
So, it’s very obvious, why LVMH is a business worth considering for long term oriented growth investors, here are the most important factors:
- It owns tens of the most valuable brands, amongst their porftolio Louis Vuitton.
- LVMH has pricing power on its products and controls all production channels.
- The conglomerate’s diversification is unmatched, the group offers perfumes, cosmetics, jewelery, leather bags, cloths, luxury watches, cognac, wine, champagne, brandy, yachts, travelling etc.
- Trough its massive diversification, LVMH is significantly less cyclical than its peers (e.g. in a deep recession, even affluent people reduce purchases of luxury watches, but consumption of champagne remains resilient).
- The strategy of the company has a clear focus on all products being high margin cash cows.
- LVMH has the most dominant market position in the luxury market with an amazing global footprint.
- A broad network of distribution channels makes its products available around the globe, from luxury houses to very sophisticated and selective online platforms which are all owned by the group.
- LVMH has shown strong and growing Free Cash Flow in the last years and even during the COVID-19 pandemic with many luxury maisons being closed for months, LVMH remained profitable.
- LVMH (like Disney) has been a pandemic winner, having taken advantage once again of market oportunities and acquiring US jeweler Tiffany for a very good price, which makes the group even stronger and more compelling in its product range.
- Even after the acquisition of Tiffany for roughly USD 16 Bn, LVMH is still in a very strong financial position. S&P affirmed LVMH’s A+ rating with a stable outlook by the end of 2020. Keep in mind this was on a pandemic year, which was a huge blow for the whole world and of course also for the luxury maisons in general.
Gradual reopenings and improving mobility will lift operating profits of LVMH further and the group has proven over and over again that it has the capabilities of integrating companies and other brands very well into the conglomerate. Tiffany will contribute nicely to LVMHs top and bottom line, once synergies have been realized. There are sheer uncountable growth catalysts.
So there are so many factors working in LVMH’s favor and another extremely positive effect is the demographics: there are more and more affluent people around the world, in particular in Asia.
Now, with all these positive points said, it’s important to state that LVMH of course belongs on the watchlist of investors, but always keep an eye on the stock price.
Personally, I cannot remember having seen LVMH stocks being “cheap” or clearly undervalued. Of course not, intelligent investors know the quality of that business and appreciate the long-term growth potential. However, with a forward Price Earnings Ratio above 50, LVMH is expensive in terms of historical price dynamics. As an investor, you want to see a much lower multiple. Well, this could easily happen. Let’s put in annual Earnings Per Share growth of around 15 to 25 % for the next few years and a nice stock price drop of 10 % to 25 % which can easily happen anytime, et voilà: you get the opportunity to enter into a position of this wonderful company for a P/E ratio between 25 and 30. Just remain patient. And keep LVMH on your watchlist in the meantime!
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