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.
Investment bank analysts’ reports and targets for Richemont
My investing views
Global wealth growth – a strong tailwind
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.
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.
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
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.
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.
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.