LVMH: A Nonchalant Long-Term Compounder

seekingalpha03-19

LVMH's growth is normalizing in the high-single-digit to low-double-digit range, reassuring investors.The company had a volatile year in 2023 but delivered decent growth and maintained profitability....

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TBE LVMH (OTCPK:LVMHF) was supposed to have a rough year. Coming out of a two-and-a-half-year period of extraordinary growth, worries of a major deceleration seemed like they were becoming a reality, as the company reported supposedly underwhelming 9% organic growth in the third quarter. Investors had fled the stock, causing a 28% drawdown. Then, came the fourth-quarter report, which showed growth isn't plummeting, it's just normalizing in the attractive high-single-digit to low-double-digit historical range. The stock raced back up, along with other luxury names, and now investors could be wondering whether they missed their chance. Let's find out. The Charming Calmness Of Investing In European Luxury Most of us investors are accustomed to the Wall Street way of doing things. Investors seek perfection, fleeing companies that are experiencing a down cycle, and having a hard time sticking with management teams that don't grab their investors by the hand. I believe this is exactly what happened when LVMH's growth slowed to high-single-digits, and management wasn't willing to say \"Don't worry, it's only temporary\": Data by YCharts Well, Bernard Arnault and his luxury empire don't seem to get caught up in the panic game. They didn't seem worried when the stock experienced a 28% drawdown in April of 2023, and I'm sure they aren't celebrating today, as the stock recovered 33%, almost circling back to an all-time high. That's the beauty and uniqueness luxury investors get from their European investments like LVMH. A quiet, nonchalant, yet highly focused and extremely efficient management, which seems to be able to come out of every drawdown, big or small, with the upper hand. I think nothing paints the picture more than the following quote from Bernard Arnault, which he made during the last earnings call:  In this group, I'm fortunate in having people that I need to slow down. It's easy to develop this business. We have so many successful products but we have to resist. When you're achieving 8% or 9%, maximum 10%, I don't know for the analysts, but for me that suits me fine. [Edited by author]  It's crazy to think an €86 billion business is slowing down growth, intentionally in my view, to 8%-10%, and that's viewed by many investors as a reason to sell the stock. Recapping A Volatile 2023 As we saw in the graph above, the LVMH stock had a volatile year, seeing one of its sharpest drawdowns in history. However, looking in hindsight, LVMH had quite a typical year operationally.   LVMH Q4'23 Presentation Besides Wines & Spirits, each of the company's segments logged decent growth, despite extremely tough comparisons following two years of extraordinary growth.   LVMH Q4'23 Presentation Geographically, the United States, which is responsible for 25% of total group sales, had the lowest organic growth rate with 4%, although it saw significant acceleration exiting the year, which helped drive optimism heading into 2024. Another important geography to discuss is Asia, which is mainly China. Heading into 2023, China was expected to be a major growth driver, as the mainland was late coming out of Covid restrictions. Despite lower-than-expected recovery numbers, the region still had impressive growth, and like the U.S., it exited the year with significant acceleration. In terms of profits, LVMH delivered on the promise of maintaining its post-pandemic profitability, with gross margins at 68.8%, operating margins at 26.2%, and net income margins at 17.6%, all pretty much in line with 2022, despite significant FX headwinds. If we're looking for a weakness in results, we can find it in cash flows, as free cash flow margins declined from 12.8% in 2022 to 9.4% in 2023, primarily due to higher investments in Tiffany stores. Segment Analysis LVMH operates under five reported segments, each of which includes a portfolio of industry-leading brands.   Created and calculated by the author using data from LVMH financial reports. Fashion & Leather revenues grew 9.1% to €42.2 billion, achieving an 18.6% CAGR between 2016-2023. The segment's operating margins were 39.9%, declining primarily due to 5 percentage points of FX headwinds. The segment which includes Louis Vuitton and Christian Dior generates operating margins almost on par with Hermes (OTCPK:HESAF), which is quite impressive.   Created and calculated by the author using data from LVMH financial reports. Selective Retailing revenues grew 20.4% to €17.9 billion, reflecting a 5.9% CAGR between 2016-2023, as several lines of business are yet to fully recover from the pandemic. The segment's operating margins were 7.8%. The segment which primarily represents Sephora, grew more than twice as fast as Ulta Beauty (ULTA), although it's not a perfect comparison due to Sephora's more expansive geographic presence.   Created and calculated by the author using data from LVMH financial reports. Perfumes & Cosmetics revenues grew 7.1% to €8.3 billion, reflecting a 7.6% CAGR between 2016-2023. The segment's operating margins were 8.6%, still significantly below pre-pandemic levels, primarily because competitors are heavily discounting products amid industry normalization, and because of significant FX headwinds as well.   Created and calculated by the author using data from LVMH financial reports. Watches & Jewelry revenues grew 3.0% to €10.9 billion, achieving a 17.8% CAGR between 2016-2023, but it includes a significant contribution from the Tiffany acquisition. The segment's operating margins were a record 19.8%.   Created and calculated by the author using data from LVMH financial reports. Lastly, Wines & Spirits revenues declined 7.0% to €6.6 billion, reflecting a 4.5% CAGR between 2016-2023. The segment is going through a downcycle due to a high level of inventory and lackluster replenishments with end-sellers. On the positive side, we saw that growth turned positive in Q4 on an FX-neutral basis, and the segment's operating margins were a record 31.9%. Looking Ahead LVMH does not provide guidance, and no comparable luxury company provided us insights into the industry trends for the first three months of 2024. However, LVMH does have several tailwinds heading into the year. First, on FX, both the Japanese Yen and Chinese Yuan are currently higher against the Euros compared to 2023, while the Dollar is essentially flat. In 2023, FX was a 4-point drag on reported growth and hurt margins as well. That should improve. Second, regarding top-line growth, Wines & Spirits and Watches & Jewelry should have easier comparisons, with the latter having more second-half-weighed. Third, on profitability, Perfumes & Cosmetics and Selective Retailing should continue to progress toward historical levels. And, for what it's worth, Bernard Arnault did provide some color on 2024, saying they expect to maintain significant growth, and specifically said the U.S. market should be more \"dynamic\", which presumably means it will grow faster than 2023. Valuation As always, I find consensus estimates for the European luxury empires too low. So far, I've been mostly correct with my assessment. Something about the combination of a European company that doesn't meet with analysts very often, doesn't provide guidance, and has a line of a business that's extremely difficult to predict, makes it so analysts are taking a cautious approach, and I can understand that. That said, current consensus estimates stand at revenues of €90.6 billion, and EPS of €32.36, or net income of €16.1 billion. Starting with the revenue figure, which represents 5.2%. This is materially lower than Arnault's 8%-10% target, and that would mark one of the lowest levels for the company over its lifetime, excluding the pandemic. Furthermore, that is in line with Q4 growth, despite the fact that Q4 had a much tougher comparison and more significant FX headwinds. Now on net income, which reflects margins of 17.8%. I believe it's too small of an improvement compared to 2023 considering the FX drag is expected to become a tailwind. Furthermore, as we discussed, there are at least two segments that are still on a recovery trend which I see no reason will stop. I'm confident in LVMH's ability to outgrow these expectations, and my own estimate is 9% revenue growth, with slightly better margins, resulting in an EPS of €34.5. Overall, consensus estimates put the stock at a 26.6x P/E over 2024, whereas my estimate puts it at 25.0x. Data by YCharts As we can see, those are not elevated levels for LVMH post-pandemic, taking into account growth rates should normalize and the valuation multiple should find a steady ground in the mid-twenties range. Data by YCharts Even if we look at pre-pandemic levels, we can see this is a pretty average valuation for the French conglomerate, reflecting a fair valuation. Conclusion LVMH silenced doubters pretty quickly, after showcasing growth acceleration in the fourth quarter of 2023. Once again, the Arnault-led empire was able to withstand a tougher consumer environment, demonstrating its primary businesses are true luxury. Following the sharp stock recovery, LVMH now trades at a fair valuation. However, I find consensus estimates too low and believe the company has room to beat expectations in 2024, especially due to easier comparisons. I find the stock to be a Hold at these levels, but I think investors who don't have a position should consider initiating one even at these levels, and slowly increase their stake over time. LVMH is a long-term high-single-digit to low-double-digit growth compounder, and I don't think that would change in the foreseeable future.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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