Gavekal Capital: European Luxury: LVMH

Tuesday, January 28, 2014

European Luxury: LVMH

As LVMH Moet Hennessy prepares to report fourth quarter earnings results on Thursday (following a disappointing Q3 release), we thought we'd take a closer look at MSCI Europe's largest luxury retailer.

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One of our favorite indicators is how much a knowledge leader invests in research and development, advertising, and firm specific resources.  LVMH stands firmly in the middle of the pack versus its European peers:

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When we take a longer-term view, however, we see that the company's capital investment as a percent of sales has remained stagnant over the last decade-- a distinct difference versus competitors that have, in some cases, tripled their efforts:

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LVMH has below average levels of cash and higher than average debt:

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For the group as a whole, net debt as a percent of total capital has fallen from an average of 7.0% in 2001 to a low of -10.9% in 2011, however:

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The company's net margins and ROIC are both about twice what they were a decade ago but neither distinguishes LVMH as a leader in the sub-industry :

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And valuations (in this case, P/CF) have nearly doubled from lows in 2007:

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Looking forward, analyst estimates are for average growth in sales and earnings:

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LVMH has been the worst performer in the group over the last one- and four-year time periods, a trend that has eased somewhat more recently as other peers have begun to struggle:

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Whether this underperformance is the result of slowing trends in luxury spending among Chinese consumers or is the result of some kind of fundamental issue remains to be seen.  We will be closely watching the next area of support in our point-and-figure charts for any breakdown in relative performance:

(versus the MSCI World)
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(versus MSCI Europe)
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