LVMH stock: I see a buying opportunity (OTCMKTS: LVMHF) (OTCMKTS: LVMUY)

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Thesis

LVMH (OTCPK:LVMUY) stock is down 20% year-to-date and the accumulation and stock position looks attractive at market in terms of both business growth and value accumulation, a P/E multiple

I value LVMH based on a residual earnings framework – anchored on consensus analyst estimates – and calculate a fair share price of $141.77/share, implying about a 15% upside .

About LVMH

LVMH is a France-based holding company and arguably the world’s leading luxury conglomerate. The company develops, manufactures and distributes some of the world’s most popular luxury goods in five main segments: wines and spirits, which account for approximately 45% of sales; Fashion & Leather Goods with around 10%; Perfumes & Cosmetics with an additional 10%; Watches & Jewelry with 5%; and Selective Distribution for the rest. Furthermore, LVMH is also active in the hotel industry (Bulgari Hotels & Resorts). Specifically, LVMH’s portfolio includes more than 70 brands, including names such as Louis Vuitton, Bulgari, Dior, Kenzo, Givenchy. In 2021, LVMH also completed the acquisition of Tiffany & Co. Geographically, LVMH’s primary target market is Asia, accounting for 40% of sales, EMEA accounting for 25%, and America from the North with about 25%. LVMH has significantly outperformed the market over the past 5 years – the stock is up around 170%, while the Eurostoxx has remained stable over the same period.

The Opportunity

LVMH stock is down around 20% year-to-date as the company is under pressure from several headwinds: 1) rising yields, inflation and cautious sentiment towards risky assets, 2) slowing consumer confidence and 3) macroeconomic headwinds, including Covid-19 lockdowns. in China. That said, with the stock now trading at a one-year forward P/E of less than x20, the stock has never been cheaper in the past decade.

There are good fundamental reasons why LVMH shares could be a good buying opportunity, in my opinion. First, LVMH’s luxury offerings are less cyclical — or at least less vulnerable to recessions — than most investors might expect and assume. During Covid-19, for example, LVMH’s sales only fell from $60.1 billion to $51.0 billion and net margins compressed only about 2 percentage points. Notably, in 2021, the company recorded net income of $5.77 billion and operating cash of over $12 billion. Second, the Chinese economy is showing signs of strengthening consumer confidence and business activity as Covid lockdowns ease and the government pushes more for economic stimulus. I think LVMH is in a unique position to benefit from China’s reopening story. Third, in my view, LVMH is poised to continue to enjoy a strong multi-year wind of support from the global acceleration in demand for luxury goods. According to BCG, the global luxury market is expected to grow at a CAGR of 6% between 2022 and 2026. Finally, investors rightly consider LVMH one of the best managed companies in the world. The culture led by LVMH’s founders is driven by creativity and premiumization, supported – over a long period – by high brand equity, pricing power, accretive M&A transactions, steady revenue growth volumes and revenues and a steady accumulation of value.

Financially, LVMH is doing very well. In 2021, the company generated $75.95 billion in revenue and $14.2 billion in net income (18.7% margin). Operating cash was $22.06 billion. The company ended the first quarter of 2022 with $12.02 billion in cash and cash equivalents and $39.3 billion in total debt. According to the Bloomberg Terminal in July 2022, consensus analyst forecasts estimate LVMH revenue for 2022 and 2023 at $83.25 billion and $90.80 billion. EPS are estimated at $6.27, $7.10, respectively.

Valuation of residual profits

Let us now look in more detail at the valuation of LVMH. I constructed a residual earnings framework based on consensus analyst forecasts for EPS through 2025, a WACC of 8%, and a TV growth rate equal to nominal GDP growth (3%).

In my opinion, the assumption of long-term growth equal to GDP growth could certainly be an underestimate, in my opinion, but I prefer to be conservative. If investors wish to consider a different scenario, I have also attached a sensitivity analysis based on a varying combination of WACC and TV growth. For reference, red cells imply overvaluation, while green cells imply undervaluation relative to LVMH’s current valuation.

Based on the assumptions above, my valuation estimates a fair share price of $141.77/share, implying approximately 15% upside potential based on accounting fundamentals.

LVMH Valuation Residual income

Consensus of analysts; Author’s calculation

Sensitivity table Volkswagen valuation

Consensus of analysts; Author’s calculation

Risks

In my view, LVMH stock is significantly reduced at a P/E (FWD) below 20 and the risk/reward ratio looks favourable. However, investors should note the following risks that could cause LVMH stock to deviate significantly from my target price: 1) slowdown in consumer confidence due to inflation outpacing wage growth, rising interest rates interest and rising unemployment; 2) LVMH’s significant exposure to China, which is in particular the containment linked to Covid-19; 3) macroeconomic uncertainty related to the monetary policy actions of the ECB and the actions of the European government against Russia.

Conclusion

While 15% upside doesn’t sound like much, I see LVMH as a buying opportunity. My recommendation is based on the undisputed leadership of LVMH in the luxury sector. In my opinion, LVMH ranks among the best-run companies with a proven track record of growing EPS, successfully executing mergers and acquisitions, and true business creativity. Moreover, the brand value is unmatched in the fashion industry. In this context, a P/E

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