Like a lot of stocks, French luxury goods giant LVMH (MC) has had a strange year so far. The Louis Vuitton owner looks ripe for a tough period due to the COVID-19 pandemic, yet you wouldn’t know that from its share price. It trades around the €400 per share mark, barely down on its opening 2020 price of circa €420 per share. We can thank global central banks for that – with the shares up 40% from their March lows.
I imagine that most readers are familiar with the company’s brands. It owns around 75 in total, drawn from right across the spectrum of luxury goods. Whether it is leather goods and jewellery, or champagne and perfume, LVMH has a business line in just about everything. Well-known names under its umbrella include the likes of Christian Dior, Bulgari, TAG Heuer and Dom Pérignon. The flagship Louis Vuitton brand currently brings in around a quarter of the company’s €54b annual revenue.
It would be fair to say that this one has been a major growth story. LVMH’s core brands generate a bunch of profit, while the relatively low dividend payout ratio has allowed the firm to generate large amounts of retained profit. That typically funded expansion, not to mention bolt-on acquisitions, which fuelled even more profit growth. Throw in the rising global rich – an incredible growth engine for the firm – and it is no wonder the stock has done so well. The company has increased per-share profit (“EPS”) at a 12% per annum clip over the past fifteen years. It also paid out around €40 per share by way of cumulative dividend cash in that time.
COVID-19 obviously throws a short-term spanner in the works here. LVMH’s retail network, which spans around 5,000 stores in total, is an obvious short-term casualty. I’d wager that nearly all of them were closed at some point for obvious reasons. The company has managed to secure some level of rent reductions, though the pandemic is obviously a catastrophe for most types of physical retail.
There is also the fact that recessions tend not to be good for cyclical areas of the economy. You probably would not expect €1,750 handbags, which is roughly what Louis Vuitton retails for these days, to fly off the shelves quite so readily in this kind of environment. On that note, check out the company’s 1Q20 trading update for a taste for how things will look this year. It is obviously a bit out of date now, but the €10.6b it booked in revenue represented a 17% drop on 1Q19 in organic terms. Asia (excluding Japan) recorded a 32% revenue drop, not surprising considering what was happening in China at the time.
LVMH is ordinarily a money spinner. Cash generated by its operating activities clocked in at circa €11.7b last year, while it spent around €3.4b on capital expenditure. The previously announced FY19 dividend of €6.80 per share implied another €3.4b or so in cash outflow. Quick maths shows plenty of retained cash in ordinary circumstances. Given these are most definitely not ordinary circumstances, the company has had to take some pretty drastic short-term action. It has slashed capital spending by circa 40%, while the FY19 dividend was lowered to €4.80 per share. Those actions should save the company an extra €2.3b this year.
LVMH ended last year with around €6.4b in cash & short-term investments. Total financial debt stood at circa €14.9b. Keep that in mind because the company is also on the hook to purchase American jewellery firm Tiffany for $135 per share. That is an all-cash deal, worth roughly $16.4b if my maths is correct. Fortunately, debt has never been cheaper. The firm raised over €9b back in Q1 at low interest rates, plus another €1.5b a few months after that. It also has untapped credit facilities available should it need them. Overall, I don’t see any issues here. Analyst profit estimates imply a return to circa €4.25b retained profit generation from next year, enough to comfortably deal with debt.
I have owned LVMH stock for a few years now. It stands to reason that I am a long-term bull on the company and its stock. It still has tremendous room for growth, particularly in Asia. Fifteen years ago, revenue per share attributable to the region came in at roughly €3.50. That had grown to around €31.90 as of last year. It is reasonable to assume that those consumers will continue to get wealthier, so that figure has room to grow.
That said, here’s one thing to bear in mind. Analyst estimates have FY21 EPS at circa €14.50, pretty much what the firm earned in FY19. That puts the stock at circa 27.5x forward earnings. Longer-term, I actually think the company will justify that price tag. It can throw off double-digit earnings growth for some time to come, enough to offset a degree of valuation contraction. The stock also continues to benefit from the current interest rate environment. For those reasons, I’d characterise LVMH as a strong hold right now.
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