LVMH Moet Hennessy – Louis Vuitton SE (LVMHF) has taught investors invaluable lessons about not following the media hype when investing, as LVMHF reached its previous highs in early 2023. Observant investors should recall that the media was rife with LVHM articles then. Why? Because LVMH chairman and CEO Bernard Arnault saw his net worth crossing the $200B mark in early April 2023, as Bloomberg reported, he became “the third person ever to reach such heights of personal wealth.”
At that time, Arnault had already surpassed Tesla (TSLA) CEO Elon Musk to become the world’s richest person (a position that Musk has since reclaimed). As a result, the media was discernibly more excited in early 2023. Bloomberg even provided detailed coverage in February 2023 of how Arnault was thinking about his succession plans, as he was already 73. Since LVMHF topped out in April 2023, media coverage on LVMH has slowed to a “crawl,” relatively speaking. Investors who chased LVMHF in early 2023 have experienced a steep decline of nearly 30% from its 2023 highs through its January 2024 lows. As a result, LVMH has fallen steeply into a bear market, suggesting investor optimism has been justifiably deflated.
Therefore, it’s another reminder of why price action investing in wide-moat luxury stocks like LVMH works. It helps investors avoid adding exposure when the market is assessed to be over-optimistic, and consider buying more aggressively when things look bleak. For fundamentally strong stocks like LVMH, buying significant declines has worked well, as it delivered a 5Y and 10Y total return CAGR of 22.2% and 17.7%, easily outperforming the S&P 500 (SPX) (SPY) over the same period.
For investors unfamiliar with LVMH, I encourage you to visit its IR website. You have likely heard about some of its prominent brands, such as Louis Vuitton, Bulgari, Fendi, Givenchy, Tag Heuer, Hennessy, Moet & Chandon, Glenmorangie, and Sephora. However, CFO Jean-Jacques Guiony reminded analysts in its third-quarter update conference that the company has 72 brands. Hence, the company doesn’t report the operating performance for “each and every brand.” Despite that, investors should know that fashion and leather goods are the company’s most significant revenue drivers (50% of Q3 revenue), while wine and spirits are the smallest (7.6% of Q3 revenue). In total, the company operates six operational segments and is globally diversified. But what happened to LVMHF that the market decided to deflate its rally and sent it into a bear market, as it revisited lows last seen in November 2022? Well, you probably guessed it: China.
China was mentioned no less than 20 times in its Q3 update between management and analysts on the call. Chinese consumers are critical players in the global luxury industry. Accordingly, 25% of the global luxury industry revenue “is attributed to Chinese consumers, with potential growth to 40% by 2030.” Luxury consumers have demonstrated their resilience, dodging the economic malaise in the broad Chinese economy. However, the growth rates driven by the pandemic surge shouldn’t be expected to be sustained, as luxury market growth isn’t like your tech growth opportunity.
While SaaS products are highly scalable, luxury goods manufacturing and distribution thrive on scarcity in demand/supply. As a result, companies like LVMH must navigate a “sweet spot” to ensure that they remain market leaders but do not overdistribute the products. Jean-Jacques Guiony also stressed to investors and analysts that a growth normalization phase after an outsized growth period shouldn’t be surprising:
So at some point, growth rates have to normalize. You can’t grow a business by 30% per annum forever. So, the business has to consolidate. We cannot open that many stores. Otherwise, we will end up over-distributing the brand. So we also have to figure out what is the exact size of the distribution system and how do we want to express the brands in terms of category. This should generate healthy growth going forward. – LVMH Q3 update conference
RBC analysts also highlighted that “the luxury market is approximately 25% above 2019 levels.” As a result, the research firm believes the recent growth momentum is “unsustainable,” suggesting investors who didn’t chase the over-optimism (stirred by the media frenzy) should welcome the LVMHF bear market.
LVMHF’s forward EBITDA multiple of 12x has normalized in line with its 10Y average of 12.4x. As a result, I assessed that LVMHF is no longer expensive. Given its wide-moat rating and stable and robust profitability margins (FY23 estimated adjusted EBITDA margin: 33.6%, FY24 estimated adjusted EBITDA margin: 33.5%), a well-balanced valuation is a reasonable proposition.
As seen above, LVMHF’s recent recovery was rejected at the $825 level in December 2023, falling further over the past three to four weeks. As a result, it has inched closer to its October 2023 lows, in line with its 200-week moving average or MA (purple line).
However, I didn’t assess any bear trap (false downside breakdown), which could have improved the robustness of LVMHF’s buy levels. Despite that, LVMHF has remained in a medium-term uptrend, sustained by its 200-week MA, as seen in September 2022 and October 2023. In other words, if dip buyers could return more aggressively to help LVMHF bottom out between the $690 to $720 level, we could have seen the worst in its recent decline based on its October 2023 lows.
Consequently, I gleaned that the ongoing growth normalization phase of LVMH is constructive, which has likely been baked into its price action and valuation as it fell steeply into a bear market. It has also likely bottomed out in October 2023 (remember that the market is forward-looking), suggesting dip buyers should consider capitalizing on its recent weakness to buy more shares.
Rating: Initiate Buy.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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