About the company
LVMH is a French multinational luxury goods conglomerate, headquartered in Paris. The company was formed by the 1987 merger of fashion house Louis Vuitton with Moët Hennessy, a company formed after the 1971 merger between the champagne producer Moët & Chandon and Hennessy, the cognac manufacturer.
Investment thesis
We changed our stance on LVMH from a neutral to an overweight position with a price target of €167/share. Post the 2015 results, we are confident that the Group delivered and will continue to deliver positive results in the years ahead.
In 2015, the group not only managed to generate positive results across all its divisions but we expect this positive trend to continue mainly through innovation, reduced costs and growth through acquisitions. The strong demand and increased profitability of its well renowned brands (even in difficult times) adds conviction in the positive outlook for this stock.
Another important positive for the group is that it managed to increase its free cash flow by 30 per cent in 2015 to €3.6 billion. This puts LVMH in a favourable position where it can use the cash to either buy start-ups or return cash to shareholders via special dividends and/or share buybacks.
LVMH also raised the dividend on 2015 results by 11 per cent to €3.55 a share.
Arguments in favour of LVMH:
• Management continue to invest in innovation and we are seeing it pay off as it continues to improve both profitability and margins, even in an environment of subdued growth forecasts
• We expect margins to continue to improve (though at a slow rate) due to benefits gained from new products launched across all divisions
• The Wines and Spirits Division which was a weak link in the past due to de-stocking has finally started to contribute positively to the bottom line. We expect positive results in the year ahead
• The watch & jewellery division continues to contribute handsomely towards margin improvement especially through the constant launch of new products within the division
• In 2015, free cash flow increased by 30 per cent now at €3.6 billion. This puts the Group at a competitive advantage with the cash available to pick up start-up companies on much more attractive valuations
• The group could also return additional cash to shareholders through special dividends or share buybacks
Concerns
• We do not expect the group to benefit from forex gains in 2016
• If the global economic crisis continues, it will continue to effect equity markets negatively, including shares of LVMH
• Although we are not expecting a hard landing in China, if it had to occur, LVMH would suffer the repercussions due to its large exposure to China
Division analysis:
• Fashion and Leather Division - LVMH’s Fashion and Leather division drove overall performance in 2015. We expect this positive performance to continue in 2016 as the Group continues to launch new products and major brand repositioning. This launch of new products is something which we have been waiting for. Management have always been at the forefront of innovation in the perfume and watch business. Though over the last couple of years, it lagged innovation in the fashion segment. Now we are getting positive results from this division too and expect to see positive contribution to sales in 2016 and beyond
• Watches & Jewellery Division – margins continue to increase in this division as we continue to see innovative products, especially in the watch and perfumes division. This division has always contributed positively towards the bottom line and we expect this to continue in the years ahead. Management has proven to be at the forefront of innovation when it announced a partnership with Google and Intel to produce a watch to rival Apples watch.
• Wines & Spirits Division – in previous year, this business was a drag on the overall performance of the company due to destocking. That phase is now over and we are finally seeing positive results from this business too. We expect to see demand pick up in the year ahead
• Selective Retailing – we continue to see double digit gains from Sephora which is making up for the weakness in DFS. We expect Sephora to continue generating positive returns in the years ahead.
Other
Positive statement from management - LVMH Chief Executive Officer Bernard Arnault expressed confidence that the group can continue to outperform its luxury sector peers in the upcoming year, despite an “uncertain” business climate.
Disclaimer: 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. Calamatta Cuschieri Investment Services. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.