Is It Too Late To Buy Louis-Vuitton Moet-Hennessy As It Pops 7%

| About: LVMH-Moet Hennessy (LVMUY)

Summary

LVMH just released Q2 Earnings.

The stock popped +7% in Paris this morning.

Is it too late to buy this diversified, luxury brand conglomerate.

Introduction

Louis-Vuitton Moet-Hennessy (OTCPK:LVMUY) released 2016 H2 results last night after the market closed in Paris. Whilst the results themselves were nothing to write home about the stock rose an impressive +7% today. The reason: the stock had traded low since Brexit and the ongoing terror situation in France in the expectation that earnings would be hit harder.

LVMH is regarded as one of the world's leading and largest luxury goods makers. Revenues are sourced from sales of champagne, cognac, whiskey, fine wines, leather goods, clothing, perfume, cosmetics jewelry and luxury watches. Its many brands are household names.

Big Picture Stuff

Market Cap

78,000

Yield

2.30%

Net Debt

5,300

Sales

35,664

Operating Income

6,384

Net Income

3,573

(EUR Millions)

The stock should ideally be purchased on the Paris exchange where trading volumes are about 1M per day. The stock can also be purchased as an ADR in the US OTC market. The ticker is LVMUY. Trading volumes are about 123,000 per day.

The dividend is paid twice per year in December and April. French Dividend Withholding Tax is 25% by default. Whilst you should get professional tax advice, tax treaties generally mean that you can count the 25% already paid/withheld against the full tax due in your home country. In addition, you should be able to get the DWT reduced to 15% if a tax treaty exists but this usually proves messy and complicated. Reminder: I am not a professional tax adviser.

10 Year EPS and Dividend History

Strong, successful brands usually produce steady and sticky earnings that can support a growing dividend. LVMH is no exception in this regard although the dividend did decline slightly in 2009 but the overall trend has been very positive.

Q2 Earnings Highlights

  • Stock price up 7% on last night's earnings to 154EUR
  • 3% Sales Growth but profits stable
  • US performing well
  • China recovering
  • French business hurt by terrorism and air traffic control strikes

Sales by division for H1 2016 Vs H1 2015 were as follows:

Euro millions

First half 2015

First half 2016

% change

Reported

Organic*

Wines & Spirits

1 930

2 056

+7%

+9%

Fashion & Leather Goods

5 933

5 885

-1%

0%

Perfumes & Cosmetics

2 228

2 337

+5%

+8%

Watches & Jewelry

1 552

1 609

+4%

+4%

Selective Retailing

5 275

5 480

+4%

+5%

Other activities and eliminations

(211)

(179)

-

-

Total LVMH

16 707

17 188

+3%

+4%

Profit by division for H1 2016 Vs H1 2015 were as follows:

Euro millions

First half 2015

First half 2016

% change

Wines & Spirits

482

565

+17%

Fashion & Leather Goods

1 661

1 630

-2%

Perfumes & Cosmetics

249

272

+9%

Watches & Jewelry

205

205

0%

Selective Retailing

433

410

-5%

Other activities and eliminations

(75)

(123)

-

Total LVMH

2 955

2 959

0%

DCF Value Estimate

Assumptions

  • 2016 Sales Growth +3% (in line H1 2015 -> H1 2016 Growth)
  • 2016 Sales Growth +4%
  • 2017-2020 Sales Growth +5%
  • Long term growth of FCF +4%
  • Hurdle Rate +8% per year
  • Cost of Capital 3% (Hurdle Rate Less LT Growth Rate)
  • Sales Growth over last 10 years has been about +10% pa
  • FCF Growth over last 10 years has been about +9% pa
  • FCF Margin over last 10 years has been 10%
  • Ongoing assumptions for FCF margin is 10%
  • Net Debt is deducted from Sum of FCFs to arrive at Fair Value

EUR Billions

Sales

FCF

PV FCF

2015

35.70

3.57

2016

36.77

3.68

3.40

2017

38.24

3.82

3.28

2018

40.15

4.02

3.19

2019

42.16

4.22

3.10

2020

44.27

4.43

3.01

Terminal Value

91.20

62.07

Present Value All FCFs

78.05

Net Debt June 30th 2105

5.3

Fair Value Estimate

72.75

Market Cap July 27th 2016

78.4

FV/Mkt Cap

93%

Today Price

154 EUR

FV Price

143 EUR

10% Margin of Safety

129 EUR

20% Margin of Safety

114 EUR

Conclusion

LVMH appears to be trading slightly above my fair value estimate. This result is not surprising given the portfolio of brands that LVMH owns that result in a steady and well-diversified business that can command strong margins.

The price of LVMH tends to drift back to around 135EUR during correction opportunities that Brexit and the like provide. My advice is to wait for such a pull-back before buying LVMH.

LVMH could well surprise to the upside given its strong growth history over the last decade, but such growth is difficult to maintain in the long term and I feel it is prudent to use a more conservative growth rate of +4%.

In addition, LVMH has been a fine steward of capital over the last decade. Buy and hold investors may wish to pay a premium for a business that has a fine record of investing the balance of profits it has not returned to you in dividends/buybacks for double digit returns … often the forgotten part of owner earning returns.

Disclosure: I am/we are long LVMUY, LVMHF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

About this article:

Expand
Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: , , , Apparel Stores, France
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here