A deeper look at LVMH (part 2)

I recently got some boots-on-the-ground research on luxury-goods giant LVMH (MC.PA)...

As one of my readers, Yacov S., says: "LVMH is a must-own stock for anyone. I just visited the store on Rodeo Drive in Beverly Hills. You have to wait outside in line to get in, and when you finally get in, they have no inventory of their beautiful jewelry, watches, and other items."

Similarly, readers May T. and Martin P. have promising reports from Asia...

As May says, "I've been crisscrossing China for almost a month now. Louis Vuitton bags are very popular here and I think LVMH should have no problem regaining its strong growth."

Meanwhile, as Martin says, "I just returned from Beijing and Shanghai, which are both booming. I'd say the new government stimulus package means that downturn is in the rearview mirror."

So with this in mind, today I'm rounding out my analysis on LVMH...

As a reminder, the company's full name is LVMH Moët Hennessy – Louis Vuitton, Société Européenne. (It's headquartered in France and its main listing is on the Paris stock exchange, but it also trades over the counter here in the U.S. under the ticker LVMUY.)

And as I discussed in yesterday's e-mail, LVMH's financial statements look very strong overall: revenues, earnings, and free cash flow ("FCF") have grown strongly over the past two decades. That has made the stock an exceptional long-term performer.

However, LVMH has been hammered recently – the stock is down roughly 35% in the past eight months.

What gives?

So to take the next step in my analysis, I'll look into the headwinds that have knocked down this premium brand and discuss what I think the future holds for its stock...

Let's start with the reasons for the decline.

At the heart of the problem, LVHM's revenues and earnings have been sliding this year...

This chart from LVMH's presentation at its annual general meeting on April 18 shows its revenue breakdown by business segment for last year – about half comes from its famous fashion and leather goods:

And this chart from its third-quarter earnings presentation last month shows the revenue breakdown by region so far this year... as you can see, LVMH is well diversified globally – with Asia (excluding Japan) as the largest segment, which is mostly China:

This chart from the same presentation shows the source of the revenue decline: while sales in Japan are up 36% in the first nine months of this year, they're down 12% in the rest of Asia (again, mostly China):

And as you can see, the trend is poor – Asia (excluding Japan) sales declined 6% in the first quarter, 14% in the second, and 16% in the third.

This next chart from that same presentation shows LVMH's revenue trends by division, with particular weakness in wines, spirits, watches, and jewelry – I would guess because Chinese buyers aren't splurging as much:

For additional insight into what's going on, I turn to my readers, who shared some wise insights...

For example, Ed C. and Alan F. are focused on the troubles in China. "I have had this on my watchlist for some time and believe the recent drop in price is due to factors like customers on a tighter budget and issues in China," Alan wrote.

(Alan also shared a nice note: "Just wanted to preface this e-mail by saying thank you. I love your content, and as a recent 22-year-old NYU Stern graduate, I have been reading every single newsletter for over the past year! I'm getting a great education on a plethora of companies, and I truly appreciate your hard work. Your advice to stay invested in the market due to the current economic conditions has saved me from pulling out due to enriched valuations multiple times!")

Meanwhile, other readers – like Yacov, May, and Martin – are more bullish. And Joel B. gives a nice summary of why he likes the stock:

Here's my LVMH investment thesis in a nutshell:

• LVMH has a huge brand moat, owning over 75+ global, iconic luxury-goods brands across six core business verticals; there are high barriers to entry based on the heritage and prestige of these brands.
• High-quality business fundamentals: 10-year revenue [compound annual growth rate] of 11%; strong gross, net and FCF margins; excellent capital efficiency metrics (5-year averages, [return on equity] 24%, [return on capital employed] 18%, [return on invested capital] 12%).
• The business is relatively immune to technological change and disruption. As [LVMH CEO] Bernard Arnault once said: "Can you say that in 20 years, people would still use the iPhone? Maybe not. What I can say today is that, in 20 years, I'm quite convinced that people will still drink Dom Perignon."
• Family-owned and controlled with CEO Bernard Arnault and his children running the company with a succession plan in place; focusing on long-term brand building decisions over short-term initiatives.
• LVMH has a long-term secular growth trend of the expanding middle class globally and further [mergers and acquisitions] capacity for continuing to acquire up-and-coming luxury goods brands.
• Arnault, one of the world's richest people, has been consistently [buying] his stock throughout this 2024 drawdown as the share price has fallen.
• The current share price drawdown is largely due to short-term, macro headwinds – essentially weakening demand from Chinese consumers (the largest market for luxury goods worldwide). What happens when the clouds part and Chinese consumer confidence and spending swings back?

This presents a fantastic opportunity to buy a high-quality business at a significant discount to its intrinsic value, due to short term macro headwinds.

Thank you to my readers for sharing these insights! I love hearing the additional perspective. (As always, you can send me an e-mail by clicking here.)

Here's my take...

LVMH is a great business with a portfolio of timeless brands, which have allowed the company to generate ROE and pretax margins around 25%.

In many ways, the company Arnault has built reminds me of Warren Buffett's Berkshire Hathaway (BRK-B): a diversified group of businesses that crank out mountains of cash.

And I'm not too worried about the China-related headwinds...

Yes, the country faces serious short- and long-term issues. But the government has many tools at its disposal – and is using them. It has introduced measures such as interest-rate cuts, increased liquidity for banks, property-market reforms, and funding initiatives for the stock market totaling $1.1 trillion.

Also, keep in mind that starting in just a couple of months, LVMH's year-over-year comparisons in 2025 will be easy relative to this year's depressed numbers.

So it really just boils down to valuation...

As of yesterday's close, LVMH has a roughly $301 billion market cap and $33 billion of net debt, giving it a $334 billion enterprise value ("EV"). The stock is trading at 3.7 times revenue, 11.6 times earnings before interest, taxes, depreciation, and amortization ("EBITDA"), and 20.0 times this year's estimated earnings per share.

While those aren't cheap multiples, consider that the S&P 500 Index is currently trading at about 22.7 times forward earnings.

In other words, LVMH – a far-above-average quality business – is trading at a roughly 12% forward-price-to-earnings-multiple discount to the average large company. That's pretty attractive.

So if I owned the stock as part of a conservative long-term-oriented portfolio, I would feel very comfortable holding on.

As for adding it to my portfolio, I would think about buying a half position and look to buy more if the stock sells off on, say, bad news about tariffs or a weak fourth-quarter earnings report.

And if my analysts and I do more in-depth work on LVMH and decide to officially recommend the stock, Stansberry's Investment Advisory subscribers will be the first to know.

If you aren't already a subscriber, you can find out how to become one and gain immediate access to our full portfolio of open recommendations by clicking here.

Best regards,

Whitney