When someone mentions Louis Vuitton, the first thing that comes to mind is a handbag and the second is the price tag that comes with it. If I had €5000 to spend on Louis Vuitton, I would ignore the bag and go straight for the shares. The thrill of the upside potential of the shares outweighs the satisfaction of having a bag. The following are reasons why I believe the shares will make you happier than the bag in years to come.

Attractive entry point from a technical perspective

Shoppers wait for the summer season as items go on sale. The same goes for the equity markets. The drawdown in the markets caused by the slowdown in China has created an attractive entry point. Although I cannot vouch that today’s price has hit a bottom, the probability of seeing an uptick in market prices is higher at these levels.

If history had to repeat itself

The first six months of the year were positive for the company. Management has seen an increase in sales and profits across all its business segments. Although China is not growing at the rate it is used to, so far we haven’t seen a slowdown in demand from Chinese customers. Chinese consumers are still buying Louis Vuitton products at a discount from Europe rather than China, taking advantage of the Group’s price discrepancy amongst regions.

Although one cannot ignore the weaker growth rate in China, I am confident that a growth rate of 6-7% year-on-year over the next three years is attainable and much lower than the 20% rate we had seen in 2010. My forecasts are below market expectations.

Margins

Although margins have weakened in the first half of the year, this is due to the fact that management is focusing on growth rather than cost reduction. If they had to cut down on spending mainly in the form of advertising, margins would improve. But for the moment management is focused on growing their sales and increasing LVMH’s market share.

What’s coming next?

The fashion industry is very dynamic and if you aren’t on top of things, it is easy to be shifted aside by competitors. I don’t think this will be the case for LVMH at least for the years to come. Apart from having a track record of reaching consumers expectations, if you go through the presentations and financial statements of the group, you get a positive vibe that management is working hard to create shareholder value.

Whether it’s Louis Vuitton or Tag Heuer or Sephora or any of the other segments in the group, you could see that each division is constantly coming up with new products and designs which attract consumers.

Valuation

Without the need to be aggressive on the top line and keeping in mind that there are many ways in which margins can improve, I feel confident that management are on the right track to continue to create shareholder value.

With the shares trading on a lower P/E multiple than the median of the sector, an attractive entry point from a technical perspective and a positive expected outlook for the future, I recommend going overweight LVMH shares in a well-diversified portfolio.

This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.