Stock analysis: LVMH

Logo LMVH

General overview

Louis Vuitton Moët Hennesy general overview as per 17th of July 2016:

Price: € 140,40
Dividend: € 3,55
Dividend yield: 2,53%
Market capitalization: 73,1B

Description

LVMH Moet Hennessy Louis Vuitton SA (LVMH) is a luxury goods company. The business activities of the Company are divided into five business groups: Wines and Spirits; Fashion and Leather Goods; Perfumes and Cosmetics; Watches and Jewelry, and Selective Retailing. The activities of the wines and spirits sector include the Champagne and Wines branch, and the Cognac and Spirits branch. As of December 31, 2014, the Company had around 3,708 stores. The Company’s portfolio of wines and spirit brands include Moet & Chandon, Dom Perignon, Veuve Clicquot, Krug, Mercier, Ruinart, Chateau d’Yquem, Chateau Cheval Blanc, Hennessy, The Glenmorangie Company and Ardbeg, among others. The Company’s Fashion and Leather Goods brands include Louis Vuitton, Fendi, Donna Karan, Loewe, Marc Jacobs, Celine, Kenzo, Givenchy and Thomas Pink. The Company is also engaged in the operations of business and finance media, luxury superyacht manufacturing and provision of hospitality.

 

Analysis

To analyse a stock I use a very simple formula borrowed from the book “The Single Best Investment” written by Lowell Miller (I will probably write a book review later). This formula works as follow:

High quality
+High current yield
+High growth of yield
=High total returns

Following from the formula I analyse stocks while looking at each of the parts of this formula.

 

High quality

The first question when looking at the formula is: “How do you define high quality”. This of course depends on the circumstances in the market at this moment, but we can set some general guidelines. We divide high quality in the following parts:

  • Financial strength
    • Low debt
    • Strong cash flow
    • Credit worthiness
  • Management quality

Financial strength

Low debt

Miller sets a couple of standards for low debt:

  • debt / equity ratio under 50%
  • Cash flow after taxes at least 3 times the amount of interest the company pays

When we look at LVMH, then we see a debt / equity ratio of 0.19 (source morningstar.com). LVMH has a very low debt. This keeps the interest rates low and therefore the company has less risk for rising interest rates. LVMH passed on this criteria.

According to the consolidated income statement of 2015, the net profit after taxes is 4.001M Euros. The cost of net financial debt is 78M. Therefore the interste coverage ratio is 51.3 and looks very solid for LVMH. Therefore the company passes this criteria.

Strong cash flow

The standards for strong cash flow are:

  • Annual earnings growth should be consistent and in the 5-10% range minimum.
  • Payout ratio should be less than 60%.

The earnings of LVMH in the last 10 years look as follows:

In the chart you can see that the earnings dropped quite a bit in 2015. However, this is because in 2014 LVMH sold a stake in Hermes, another French luxury brand. If you remove this from the table, then the earnings keep growing, also in 2015.

The revenue in 2015 grew 16% as the graph shows. 10% of this is due to currency exchange rates, 6% is due to organic growth. This result is very good and bodes well for the future.

Revenue growth 2015

The pay out ratio of LVMH is currently sitting at 50% which is well below our target of 60%. The pay out ratio has risen a bit over the years, but this is nothing to worry about.

Although we would want a little bit higher earnings growth over the years, the growth in earning is still good and the pay out ratio is excellent.

Creditworthiness

According to Standard & Poor LVMH has a A+ rating with a stable outlook. We have set a minimum of BBB+ and therefore the company passes.

 

Management quality

This part is much more difficult to analyze. However, there are certain factors from which you can see the quality of the management. It is important that management never lies, that the company absorbs acquisitions in a good way, that the company can extend it’s brands and that the company has a certain franchise or niche.

Looking at the trac record of LVMH we can pretty safely asume that management is doing a good job in general and that they have the best intentions with shareholders. The company operates in the luxury market which is cyclical. At this moment the economy is growing again which is good for LVMH, but of course there are a lot of uncertain factors and therefore there are risks to a luxury company. However in my view the risks are acceptable since I will be in it for the long run and looking at the past and looking at the expectations for the future, I can only imagine LVMH as a growing business in the long run.

Like I said, this part is hard to analyze, but during my search I didn’t find anything that is bad for the company.

 

High current yield

At the moment the dividend yield of LVMH is 2,54% based upon todays price and the 2015 yield. However, the dividend payment of the april payment was increased with 12,8%. Therefore if we continue this trand through 2016, then we estimate a 2016 dividend of € 3,72 which results in a current dividend yield of 2,66%. Our goal is to have a dividend yield of 3% or higher, so the company doesn’t pass on this metric. However, the gap is not to big.

High growth of yield

LVMH pays a dividend twice a year which is quite exceptional for a European company. It also has a tendency to raise it’s dividend every year. Here is a table of the dividends paid for as far as I could track them back:

To show how much the dividend has grown over the years I have included the graph below. As you can see LVMH has grown it’s dividend quite fast over the years. The same time the company halts the dividend if financial matters request for it. This has happened 2 times in the past 17 years.

We are looking for a minimum growth of dividend of 5% per year. Looking at the graph LVMH more then delivers this minimum growth. This could also help to ofset the slightly lower dividend yield of 2,66%.

 

Valuation

Looking at all of the above we have a quite good image of the quality of the company. However, a good company bought at the wrong price is still not a good buy. Therefore, we also have to look at the vlauation of the company. Miller has a set of guidelines for valuation. He uses:

  • Price / sales ratio below 1,5
  • Price / earnings ratio less then the market or less than 100 / long term bond rate, whichever is lower. Also, it is a big plus if the P/E is lower than the average of the company.
  • Book value. The lower the better, but no set of guidelines.
  • Cash and cash equivalents must be higher than last year at this time.
Price / sales

The price / sales ratio is 2,0 for LVMH. Therefore it doesn’t pass the above requirements. However, LVMH is a luxury company which usually trades above market averages. Therefore a higher price / sales ratio could be warranted. But since I’m not a financial man this is hard to judge for me.

Price / earnings

The price / earnings ratio of LVMH is 19.8 at this moment which is roughly equal to the average price / earnings ratio of LVMH. The P/E ratio of the S&P500 is 24.98 as of Friday the 15th of July. So LVMH is below that market average. It would be superb is the stock would be a little bit below it’s average P/E. However, maybe that’s wishfull thinking in a market with prices like we experience at the moment?

Book value

The price to book value is 2.9 which is exactly at the average price for this company. It indicates the same as the P/E. The company seems to be fairly valued at this moment of time.

Cash and cash equivalents

Looking at the balance sheet, we see that total current assets have risen from 18.110 to 18.950 M in 2015. Total assets have risen from 53.362 tot 57.601 M. Therefore the company passes on this measurement.

 

Conclusion

When I look at LVMH I see an interesting company that sells goods that have been around for as long as there are humans. The human being always wants to express itself using luxury items and this will probably stay like this for a very long time. Therefore LVMH is a very interesting company. Combine this with the dividend policy and the stock apreciation and you get a interesting stock that I certainly would like to own.

The question however is, if the valuation is good to buy this stock at this moment in time. If you compare the P/E to the average P/E of the company, than there is no discount at the moment. On the other hand, you pay for a very strong company with a good future ahead and that is also worth something.

LVMH is a company of which the stock price didn’t increase this year. A lot of other strong companies have a stock price that increased so much that they are overvalued in my opinion. This is not the case with LVMH and that makes it also interesting.

What do you think about this analysis and about the company? Would you buy the stock? Do you think the valuation is good at this moment? Or do you think there are more interesting alternatives out there? Which stock would you recommend? I’m curious to your opinions!

Remember, this is my very first stock analysis ever. If you have any tips, complaints or ideas, then I really welcome them. Don’t hesitate to put your remarks in the comments!

 

 

Disclaimer: While I have used reasonable efforts to obtain information from reliable sources, I make no representations or warranties as to the accuracy, reliability, or completeness of third-party information presented herein. The sole purpose of this analysis is information. Nothing presented herein is, or is intended to constitute investment advice. Consult your financial advisor before making investment decisions.

 

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