One trend that I believe will shape the economy is the growth of income inequality between the rich and poor in nearly every country across the globe. Due to factors such as globalization and outsourcing, commoditizing unskilled and semi-skilled labor, the use of modern technology to facilitate entrepreneurship and execute ideas of the creative class, and the regressive effects of inflation the United States has reached its highest level of income inequality since the gilded age of the 1870's. This trend has also extended across the globe into Europe and emerging economies such as China, Brazil and Russia. This has lead to a boom in demand for luxury goods across Asia and Latin America that more than compensate for slowing sales in the West. I think that the luxury goods sector will be one of the winners throughout the next decade as more people reach the upper classes of society not only in emerging economies, but in the West as well. Below I list three leading in companies in this industry that investors can buy to profit off the rise of the rich.
Tiffany and Company (TIF) -Tiffany's is one of the leading sellers high end jewelry and silverware in the U.S., Europe and Asia. The company carries products minted in its own brand along with third party jewelry. Investors are cautious towards rising gold and silver prices eroding margins for its jewelry. However, I believe that Tiffany can win if the prices of precious metals move either way. Since it targets a higher end market that is less price sensitive, Tiffany's can raise prices to match the appreciation or gold and silver. If prices go down, Tiffany wins from increased margins. Financially, the company is in solid shape with a debt/equity ratio of 0.3, a return on investment of 12%, and expected growth of 15% per year over the next five years.
Coach (COH) - Coach is the leading retailer of luxury handbags and leather products. Coach is extremely popular in the US, Japan, and China where it has leading market share for luxury handbags. They have taken full control of Chinese operations, by not outsourcing products to other retail shops and owning their store property outright. Coach also disallows discounting in any of its own retail outlets or major American department stores to maintain high margins and a sense of exclusivity. Where Coach stands out from its competitors is through its financial performance. The company is highly profitable and efficiently operated with 41% ROIC and a 31% operating margin. Coach has miniscule debt levels (1% D/E ratio) and is still expected to grow earnings by 15.58% over the next five years.
LVMH Moet Hennessy Louis Vuitton (OTC:MAGOF) - Louis Vuitton is the leading luxury goods company in the world. LVMH's leading segments include Wine and Spirits (16% of revenues), Fashion and Jewelry products (43.1%), Retailing (26.5%), and Cosmetics (15.4%). They control world famous brands such as Marc Jacobs, Louis Vuitton, Hennessey, Sephora, Christian Dior, De Beers, Donna Karan, Dom Perignon, and Tag Heuer. Each of these brands commands a premier position in their respective markets and therefore sells at a higher premium than competition. Buying these high caliber brands has become a status symbol globally (particularly in Asian cultures which tends to be more materialistic than the West). Another strength of LVMH is that its product lines are among the most diverse in the industry. Financially the company is in decent, but not great shape with its P/E, ROIC, debt levels, dividend, and earnings growth rate all at average levels.
Overall, I think the trend towards a consolidation of the globe's rich and poor within both first world and developing nations is a strong positive catalyst for luxury goods makers. Tiffany and Company, Louis Vuitton, and Coach are three of the leaders within this industry. However, technically they look overbought and are at or near 52 week highs, so I may wait to see whether these stocks either pull back or break through their upper resistances before buying.