Hermes: Still Worth It

| About: Hermes International (HESAF)

Stock price: €118.3 ($152.17 USD)

Conclusion: Hermes (OTCPK:HESAF) is still worth it. Although management’s new guidance is now in line with our last forecast (cf our June 8th comment), we think Hermes could do even better. We raise our valuation range to €115-€120 per share.

Q2 sales:+27% reported (+19.8% organic). H1 +22.8% (+20% organic). New guidance 2010: sales growth +10-12%- “Operating margin to improve at least by 100 bp”.

+10-12% growth for the year looks conservative.

  • Hermes forecast implies only 5% growth in H2. We think Hermes should exceed it, helped by its stong momentum in Asia, the US and also Europe. The second quarter shows no slowdown. Comps in Q3 are more or less in line with Q2, up 20% this year. Q4 will be slightly more difficult with 11% growth reported last year.
  • We look for 10% growth in H2, which should lead to +14.7% sales for the full year at constant exchange rate. Forex might add +6% to sales based on current rates. We forecast sales to reach €2310m in 2010 (+20.7%).

Operating margin could gain 130bp to 25.5%.

  • COGS and administrative expenses should benefit fro the weakness of the Euro, more than offsetting a rebound in communication expenses and continuing increases in distribution spending.
  • net earnings could jump +35% to €389m (+4% upgrade vs our previous forecast)

Hermes trades at 31.9x and 28.4xP/E based on our 2010 and 2011 forecasts. We think the premium looks sustainable (unique visibility, brand equity, potential for retail expansion), but difficult to further improve. Our valuation range (€115-€120 per share) assumes a stable premium for Hermes.