Stock Price: €74,9 ($102.34 USD)
Conclusion: Risk reward turning attractive. We are revising up our valuation range (€93-€97 per share) as a result of continuing momentum at Louis Vuitton (OTCPK:LVMHF), improved visibility on the wholesale front, a weaker Euro and improved cash flow management. We find the stock price attractive and look for 20%+ return.
F2009: Sales down 1% to 17bn (down 4% organic) in line with est. EBIT down 8% (better than our-10% forecast). EPS down 13% to €3.70 (€3.81 estimated). No guidance given for 2010, except that LVMH will reinforce its leadership.
Altough the environment remains uncertain, we expect a return to 5-6% growth in 2010.
- We have no reason to forecast slower organic growth for Louis Vuitton in 2010 (+7% organic estimated in 2009 in a recession period), in a context of a gradual macro-economic improvement. LV will continue to benefit from innovation, increased communication vs last year, new store openings albeit at a slower pace than in the past. In addition, we feel that the shift of Vuitton’s image towards greater authenticity and craftmanship is well suited to the post crisis demand.
- Retailer inventories look under control, which bodes well for LVMH’s businesses depending on wholesale: wines and spirits, watches, jewelry and perfumes. According to Moet-Hennessy (OTCPK:LVMUY), destocking was over end of December. However, we assume low single digit growth rate in champagne and cognac, which might suffer from continuing down trading this year. We also expect low single digit growth in perfumes, which is overexposed to Europe (56% of sales vs 35% for the group). Watches could return to mid single digit growth (Q4+5%), helped by easy comps in the US and increased sales in China.
- Store openings (80-90 new stores +10%) should help to boost Sephora sales, while DFS revenues become increasingly dependent on Chinese clients.
- Reported numbers might benefit from 1-2% positive forex impact based on current rates.
Margins could bounce back by 60bp to 20.6% (-140bp in 2009)
- Notwitstanding comps with favourable hedging rates in 2009, the weakening of the euro should improve the cost of goods and lead to positive translation impact.
- We expect Vuitton, watches and retail to benefit from positive leverage.
- We remain cautious for wines and spirits, as we think that down trading is not over and might prevent Moet-Hennessy to restore its margins.
- We expect SG&A to increase at a slower rate than sales unlike 2009 when they rose by 1% excluding fx vs -4% sales. As to marketing and selling expenses, we forecast faster growth owing to a rebound in communication expenses (down 110bp last year).
EPS (+19.7% to €4.42) could be further enhanced in 2010 by lower restucturing charges coupled with improved financial costs (net debt down almost €1bn end of december). We forecast free cash flow to be close to €2bn, slightly less than in 2009 as a result of a slight working capital outflow resulting from higher sales.
Following recent market turmoil, LVMH trades at 16.9x P/E and 8.7xEV/EBITDA based on our 2010 estimates. Our DCF suggests a valuation of around €97 per share. We are impressed by management’s handling of the crisis last year. Notwithstanding financial uncertainty, visibility seems slightly better today both from a macro economic perspective and inventory standpoint. Consequently, we find the risk reward attractive and look for a 20%+ upside potential. We also welcome management's comments assuring that it will focus on internal growth.
Disclosure: No position