I have been watching luxury goods companies for a long time, but I never chose to invest in them. That said, I know they are resilient growing businesses. Now, for the first time, I am considering to include one luxury goods company in my personal equity portfolio. If I do it; I know which way I am going.
The first question that appeared in my mind when I was looking at the luxury goods corporate landscape was: should I buy a basket of stocks representing different luxury sectors or should I buy a luxury goods conglomerate at once? The answer to that question, given current market prices and sector economics, was simple: go for a conglomerate. My answer came from making a sum of the parts valuation of different luxury conglomerates and independent valuations of publicly quoted mono brands. Buying a diversified group is simply much cheaper. Besides, luxury conglomerates enjoy better economies of scale in production and distribution. Among conglomerates my personal pick was, unsurprisingly, LVMH Moet Hennessy Louis Vuitton SA (ADR) (LVMUY).
Even if smaller mono brand companies like Michael Kors Holdings Ltd (NYSE:KORS) enjoy faster growth, conglomerates that sell Champagne, watches, handbags, and perfumes, such as Louis Vuitton, Moet Hennessy sells for much lower multiples and still offer aggressive top line growth. The case for Louis Vuitton Moet Hennessy is special. The company owns 60 amazing brands (Louis Vuitton, Moet, Hennessy, Givenchy, and Fendi, among many others) and enjoys wonderful economics of scale. Its Q4 results are a perfect match with its high end products reflecting the enormous quality of its management. Operating profits rose 11%, and its revenues from leather and clothing segments (where half of the profits come from) were up by 14% in 2012 – although margins contracted in that area. Maybe those numbers don’t impress analysts who are used to follow companies like Michael Kors. The wild popularity of Kors’ handbags, sunglasses, and watches has produced surging sales and profit growth. As a matter of fact, since the Initial Public Offering (IPO) in December 2011, same store sales growth has averaged about 40% quarterly. Besides, for 2013, the company is expecting to more than double the EPS last year, which would be on top of a 95% increase from 2011 to 2012. But even good stories need the right price attached to them. Michael Kors, selling at a 2013 34x P/E multiple, is not a safe investment. Just take a look at what happened to Coach, Inc. (NYSE:COH)‘s investors. Even if the company and its brand have a great story behind them, a high price requires even higher future expectations. As soon as results were below expectations, investors got hurt. Coach is down by more than 13% year to date and now trades at the reasonable multiple of 2013 13x P/E. Meanwhile, Louis Vuitton Moet Hennessy trades at 2013 17.5x P/E. Louis Vuitton Moet Hennessy’s current multiple is not what I call cheap but I am sure it’s a fair price for such a wonderful collection of businesses; plus, on top of the more than 60 brands that Louis Vuitton Moet Hennessy controls, you get exposure to Hermes which probably is the most exclusive luxury goods business in the world.