LVMH Moet Hennessy Louis Vuitton SE (OTCPK:LVMUY) is a very strong company based on my analysis with rigorous expansionist strategies that have led to it having a dominant position in the luxury industry. Based on the current lower price of the stock and decent intrinsic valuation measures, I'm investing in the company more rigorously. I've supported my investment decision on the company's strong revenue growth and margins. While the balance sheet isn't as strong and the company carries a lot of debt, I believe this is warranted by strong operational strategies including an effective acquisition record.
LVMH operations
LVMH consists of 75 maisons (or houses of operation) that include 26 maisons in wines and spirits, 14 in fashion and leather goods, 16 in perfumes and cosmetics, 8 in watches and jewelry, 6 in selective retailing, and 5 in other activities. Such a large portfolio of luxury operations makes LVMH uncannily similar to an investment house.
Louis Vuitton, Christian Dior, Hennessy, Sephora, and Tiffany & Co. are the most notable companies that LVMH has acquired. The total revenue for 2022 was €79,184m. Breaking down this revenue into sectors reveals that the fashion and leather goods segment has the highest income, with €38,648m in 2022. Selective retailing was second at €14,852m and watches and jewelry third at €10,581m.
For those who don't know, selective retailing limits the number of retail channels to make purchasing LVMH goods more exclusive and to maintain a high-end customer experience.
Louis Vuitton, Christian Dior, Fendi, Celine, and Loewe are strong brands within the fashion and leather goods segment. Notably, Louis Vuitton's revenue exceeded €20bn for the first time in 2022.
Notable selective retailing operations owned by LVMH include Sephora, a famous beauty retailer, DFS Group, specializing in duty-free shops at airports, and Le Bon Marché Rive Gauche, a historic department store in Paris.
Growth & profitability shine
Moving on from operational highlights, LVMH's financials particularly shine in terms of growth and profitability. GuruFocus ranks both of these areas as 10/10 supported by data that proves the company is elite in these regards.
For perspective, gross margins are 68.72%, better than 93.18% of 1,100 companies in the cyclical retail industry. Net margins are 18.93% and better than 96.68% of 1,116 companies in the cyclical retail industry. These margins are not uncommon for luxury, which demands a high price tag based on supreme marketing and goods purchased often as symbols of status rather than due to their intrinsic material value.
3-year average annual revenue growth is also 13.9%, and comparing that historically puts it at the upper band of a 10-year range from 1.5% to 15.7%.
Part of this revenue growth could be attributed to LVMH's continuous global expansion, including into emerging markets such as China. LVMH has, for example, formed partnerships with Chinese e-commerce platforms like Tmall and JD.com and utilized platforms like WeChat to market its products.
Louis Vuitton has released special edition handbags and collections specifically tailored to Chinese consumers. Hennessy Cognac has also been a huge success in China. These are just two examples of a range of nuanced marketing and manufacturing efforts to cater to the unique Chinese tastes.
The luxury sector is also especially resilient to economic downturns, partly due to the elite customer base and loyalty of clients who are not significantly impeded by economic hardship. This will often allow revenue to continue to grow, or at least be maintained, during times of more general economic distress.
Balance sheet concerns
GuruFocus ranks LVMH's financial strength as 6/10, so I am going to perform a detailed balance sheet and credit ratio analysis to outline some of the concerns here.
The company's cash-to-debt ratio is 0.27, which is worse than 61.80% of 1,100 companies in the cyclical retail industry. The company reported $37,231m in debt and $11,496m in cash in 2022. The debt level has been considerably higher for LVMH since it acquired Tiffany & Co in early 2021. The deal was valued at about $15.8bn and was partially financed through debt.
Analyzing the current and historical balance sheets paints an interesting perspective when viewing LVMH in terms of stockholders' equity growth over the long term.
While FY2022 saw total stockholders' equity of 40.93%, in 2017 it was 41.53%. This reveals a largely proportionate asset and liability growth rate since 2017. Total assets rose from $82,550m in 2017 to $142,633m in 2022 and total liabilities have risen from $46,601m in 2017 to $82,672m in 2022. This outlines the continued growth trajectory of LVMH with its ruthless acquisitive nature in industry and geographic expansion. As a current shareholder, this is something I see as a positive, as it is indicative of continued revenue growth and in turn, a higher share price as long as the balance sheet can be maintained at the current acceptable level.
Value opportunity
It's possible to view an investment in LVMH as a value opportunity when I consider the current price in relation to discounted cash flow analysis. It's worth noting that an investment in LVMH is clearly not a deep-value opportunity. Still, the momentary price decline due to the current overall slowdown in the luxury industry presents a momentary value opportunity from my analysis.
The organization has shown continued resilience during economic downturns, such as during the coronavirus pandemic, and during recessions, when elite customers who were relatively unaffected by such instances continued to buy LVMH products. For example, in 2009 LVMH encountered only a -0.8% revenue growth, which is significantly strong considering the global financial crisis at the time.
However, recently there has been a consensus that the luxury industry has reached a plateau of its revenue growth potential. Although revenue growth for LVMH is strong, the lower share price at the moment is largely dictated by this consensus and the weaker global macroeconomic picture right now, which includes high interest rates and inflation in LVMH's dominant geographic markets.
Based on the GuruFocus earnings per share without non-recurring items discounted cash flow analysis, LVMH is trading at only around 9.5% above fair value, with a current stock price of around $155.00 and a fair value of $141.61.
To me, this is an exceptionally strong position for the company to be in on a valuation front, because with such rigorous expansion strategies, strong revenue growth, and stellar margins, I think the company could warrant a much higher stock price at current. I believe that the market is pricing in the relative consensus of luxury revenue decline too severely into LVMH stock and hence the value opportunity lies in buying what will be at worst a luxury stalwart trading at a momentary discount.
The bottom line
My overall sentiment for LVMH at the moment is very strong. I see an adequately stable balance sheet being utilized for continued expansion, consistent revenue growth, very high margins, and a valuation that is appealing when we consider the momentary depressed price. The downsides of the luxury industry being considered as nearing a revenue growth plateau do not concern me when looking for stable, reliable companies to balance risk in my portfolio with; LVMH certainly provides this.
I'm confident in the shares that I own, and I haven't seen a reason yet to trade them out for other companies on a purely financial and operational front. I have recently purchased more shares at the lower valuation and will continue to do so until the price seems fairly valued again. GuruFocus' tools are an excellent way for me to keep track of this, with a great first reference being the GF Value chart.
