Cie Financiere Richemont and LVMH Stock Analysis
Before starting with the analysis of LVMH and Richemont (CFR), I am going to say that there is a lot of money in the world. When luxury brands more than double, or even triple their sales over the last 10 years, like Richemont and LVMH did respectively, it means the rich are getting richer. So, will the rich get richer also in the future? If yes, then LVMH and Richemont should be great investments.
Content
Company overviews
Company fundamentals
Investment bank analysts’ reports and targets for Richemont
My investing views
Global wealth growth – a strong tailwind
Investing strategy
Company overviews
LVMH is a bigger company, more diversified and therefore some suspect more stable in case of a recession, but more about the risks part later, you will be surprised about the business impact of a recession on these businesses. LVMH’s net income in 2009 compared to 2008, dropped only 20%, but that impacts the stock as analysts always project the current into the future as we will see later.
Source: LVMH
Apart from fashion, the second contributor to revenue is selective retailing. Le Grande Epicerie de Paris is a food hall, DFS is a global luxury travel retailer and Sephora mostly a cosmetics brand.
Source: LVMH
While selective retailing and fashion goods make 68% of LVMH’s sales, 73% of Richemont’s sales come from watches and jewellery.
Source: Richemont Investor Relations
The company recently completely acquired Yoox Net-a-porter for (YNAP) for a consideration of €2.7 billion and a valuation €5.3 billion as they were already the largest shareholder.
Richemont is mostly famous for its jewellery brand Cartier and the watches.
Source: Richemont business
Company fundamentals
On the surface, there isn’t a big difference between the two. LVMH has a PE ratio of 24 and a dividend yield of 1.83%.
Source: Morningstar – LVMH
Richemont has a PE ratio of 12.78 but that is mostly due to a one off non-cash tax gain, so the forward PE is close to LVMH’s but the dividend is much higher.
Source: Morningstar – RITN
The difference in dividend yields can be explained by the Swiss withholding tax of 35%. In any case, before buying, ask your broker about tax issues and check the agreement your country has with Switzerland.
Source: Richemont
The valuations are similar after the dividend tax.
The price to sales ratios are also similar, with 2.84 for RITN and 3.33 for LVMH. Sales growth is 10% for LVMH, 24% for RITN, but 8% excluding the acquired online retailer.
What is different is the stock price performance. LVMH’s stock went only up over the past 10 years.
Source: Morningstar LVMH stock price
While RITN’s stock price is back to 2012 levels.
Source: Google CFR stock price
Apart from the stock price, the balance sheets look different too.
Source: Richemont
Richemont has €10.6 billion of cash and liquid assets (1), countering €4.4 billion in long term debt (2) and €4.4 billion in bank overdrafts (3). But those can be covered by the inventory of €6 billion. The company is actually sitting on €10.6 billion in cash that doesn’t really have to be used, plus the debt to equity is 0.54. If I calculate things correctly, the liquid assets only are worth €18 per share.
On the other hand, LVMH has also €4.6 billion in cash (1), but more debt going up to €23 billion (2), plus, most of the assets are goodwill and brand or intangible assets (3). So, let’s say the balance sheet doesn’t look as good, plus, there is much less available liquidity per share.
Source: LVMH Annual report 2018
Given all the above, excluding temporary customer preferences and assuming a person buying a Vuitton bag will also buy Cartier jewellery, just based on the dividend and balance sheet, Richemont looks better. However, let’s dig deeper into the risks and investment scenarios to see what to possibly expect.
Investment bank analysts’ reports and targets for Richemont
I have received two investment bank analyst reports, those are private so I will not disclose from which bank those are. The target price for Richemont are on spot as the current prices are at around 75 swiss francs.
The first funny thing is that one analyst, as the stock dropped, lowered his price target from a figure in the 90s to the mid-70s.
As the market rebounded since December, everything went up. However, analysts have always such a short term view, actually a rear view mirror view. They further talk about the short term, quoting the management:
“During the latter part of the quarter, Sales in Europe were affected by social unrest in France’. ‘The Retail channel posted a 5% increase in Sales, with growth slowing in December due to the above mentioned temporary store closures in France and a strong comparative base for high jewellery“
The analysts conclusion is that Richemont is exposed to the Asian growth story, both in Asia and those travelling. They expect growth of 5.5% up to 2023 and then 3% onwards.
The funny thing is there is a chart, showing the price targets, as the price goes up, the targets go up and vice versa. Further, I’ll quote them on one of their risks:
“Acquisition risk, given the cash pile and a different time horizon for the returns on those than the market.”
It is mind-blowing to me how analysts and the investment community just look at what will the return be by 2020, there is nothing about value creation, future growth, actual risks and how the company would behave in case turmoil comes, or what is the return on capital employed.
My investing views
The first thing I am concerned with are customer preferences. What gives a moat to these brands and what is the level of certainty I can have in future growth. What if there is real turmoil in Europe, a slowdown globally, how would that impact it? And, what if there is a change in consumer preferences given we live in the internet era? Something to keep in mind.
The second thing I would say is, wait till there is real turmoil in Europe as the business might not be even impacted in the long term.
Source: Guardian
If you want to buy the Asian story, wait for turmoil in Europe, I can almost guarantee it will happen over the next 5 years. Further, given the Asian sales, it might be a hedge, at least a bit of it. Recent protests in France alarmed the analysts that cut their price targets from 95 CHF to 75 CHF, imagine what would a real Europan crisis do to their estimations and on sales too. The thing is that wealth globally is just getting bigger and bigger.
Global wealth growth – a strong tailwind
Apart form Europe, the second thing to look at is the wealth movements. Populism is rising; thus we can expect a bit of higher taxes over the next 10 years, especially in the developed worlds. But, still, Asia and other emerging countries will probably see their wealth triple over the next 10 years.
Source: NWWealth
That is a strong tailwind for companies like Richemont and LVMH.
Investing strategy
As a value investor, I would prefer Richemont in this case, but then you have to have the courage to buy it when it dips on a terrible outlook, as it happens every time there is something going on (2003, 2009, 2012, 2015, 2019). Even now, it is still in a dip and it might be a good short term play.
A slowdown in Asia, and a slowdown in Europe, would be very detrimental and I don’t think the cash per share would save it much. So, the upside is a 30% jump this year, double over the next 10 years, with the 3% dividend, while the downside is a 50% or larger drop in case of a global slowdown. The actual business returns will be around 5% to 7% given the earnings yield and growth.
Given the high margins of 66%, both businesses will survive anything that happens, but their operating margins range between 16% to 22%, so net income might easily fall by 50%. On a helicopter view, I think Richemont will perform in line with the market. However Apple, Google, Facebook, Amazon, Alibaba, might even do better as they don’t need to make expensive acquisitions like Yoox Net-a-porter to spice things up and go with the new age.