We increased our price target on LVMH from €167/share to €181.50 following the third quarter sales and revenue release. This represents a 10% upside to the current price.
The increase in price target is a result of an increase in the forward Price-to-Earnings multiple from 22x to 23x. The main reason for the upgrade in price target is the company’s continued outperformance in difficult times coupled with an improvement in both the wine and fashion segments which were the most concerning this year. We expect both of these segments to continue contributing positive results to the Group together with the other segments which continue to outperform as economic data is expected to continue improving.
Main points following the results:
* Sales for Q316 came in line with our estimates at €9.138bln and out sales forecast for Q416 are in line with the market at €10.614bln
* Sales growth was across all segments and higher than peers
* For the first 9 months of the year, LVMH is proving its resilience amid the luxury industry’s slowdown
* The Asian market which was a worry at the beginning of this year has proved to be resilient and we are seeing a pick-up in sales across different segments
* Main highlight from the results involve an improvement in Asia boosted sales growth at its biggest segment, fashion and leather goods, to 5 percent, the fastest pace in more than a year
* The industry has been suffering from a drop in tourism in Europe after the terrorist attacks in Paris last November and the airport bombing in Brussels in March
* Louis Vuitton introduced seven namesake fragrances
* Innovation remains at the forefront of the business model
* We expect to see a further improvement in economic data which would be positive for LVMH
We remain overweight on LVMH for the following reasons:
* Well diversified portfolio of different brands – over 50 brands across 5 sectors
* We expect to continue to see a pick-up in sales of wines and spirits. The Group is no longer going through a destocking phase like in 2015.
* We expect to continue to see Tag Heuer and Bulgari outperform expectations in their respective categories
* We expect to see continued improvement from the fashion and leather goods segment after the launch of new products by Louis Vuitton in the first quarter of this year
* We expect to see stable margins at this stage. Although it would have been better to see an improvement in margins, given the current global risks, we expect margins to come in line with last year.
* Shares are trading on an attractive dividend yield of 2.20% which is attractive when compared to European sovereign debt.
Concerns
* Global economy does not continue to recover
* The reorganisation of the team at DKNY takes longer than expected and continues to impact the top line negatively
* The exit from DKNY and the restructuring of Marc Jacobs resulted in additional pressure on margins in H116. However, we expect to see a pick-up in margins in H216 as the bulk of the costs are behind us.
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.