Update While LVMH’s share price volatility, notably of late, has caused investors to question its
appeal, we highlight our preference for LVMH vs Christian Dior. This note reviews the rationale
for our LVMH Buy rating, the risks attached to the stock, and the suggested investor strategy.
Buy rating rationale: Our thinking, previously given (details overleaf), boils down to this. LVMH
now offers superior organic sales growth vs the sector, EBIT margin stabilisation at 18-19% (in
line with the sector average from H2 after a drop of c.100bp p.a. since 2011), FCF generation
now supported by below-sector-average capex /sales ratio (5% vs peers at 5.0-6.0%), albeit
slightly hampered by now-above-average c.33% tax rate (sector at 28%), and 5-10% PE
discount vs peers even though financials are mostly in line or better than the sector and in our
view are less uncertain. Lastly, it is possible that the rapid expected degearing will lead to
enhanced shareholder return. What is hampering the stock then? a) Stock status: the
combination of low investor interest in the sector, an already large positive consensus on the
stock, and the stock’s high liquidity and role as a sector proxy; b) Group profile: as it is highly
diversified, the group is vulnerable to much of the negative macro-economic / political / FX /
financial markets newsflow currently weighing on consumers’ discretionary spending and
investors’ minds. This creates short-term spikes in demand volatility and gives investors a sense
of a lack of sustained consumer demand/consistent industry trends. c) Earnings profile:
volatile divisional performances from one quarter to the next remove any sense of a stable and
predictable environment. However, its diversification is currently an asset rather than a liability in
our view, as it enables LVMH to generate quarterly sales growth trends in the mid single digits.
SG view Putting all of this together leads us to the following strategy: in volatile markets a
buy-and-hold works for periods beyond our investment horizon because the share price is
more volatile than the fair value of the portfolio (currently boosted by the KPIs described
above). So investors should take advantage of the low entry points that appear periodically.
Note that our recent upgrade to Buy was triggered by the low share price in late August.
How we value the stock SG’s TP is the average of SOP/DCF with a 9.5% WACC and 4% LT
growth (see models pages 4, 5).
Events, catalysts & risks Risks to the price target: if the cognac sales rebound is shortlived;
if LV growth remains low.