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January 12, 2023

LVMH. LVMH Buy @ Euro772

LVMH scores 9/9 on technical indicators with the Amundi Global Luxury UCITS ETF (UCITS means UK investors can buy the shares) scoring 3/3 and the French CAC 40 index scoring 3/3. So the interesting thing is to see how LVMH features on the fundamentals to find that extra 1/10. In the process Bernard Arnault, the biggest shareholder in LVMH, has become the world’s richest man with a staggering fortune of $182.8bn, before the latest surge in the shares of LVMH. I thought I would spell that out in numbers – $182,800,000,000. This guy is well into Rockefeller territory where it was noticed that if Rockefeller went into a store and spent $100,000 he would still be richer when he came out than he was when he went in.

I had a look at the richest people of all time in today’s money. John D. Rockefeller came in at between $250bn and $400bn or around two per cent of US GDP. Far richer was Augustus Caesar who owned some 25pc of the Roman Empire worth $4.5 trillion in today’s money. I guess these figures are wild guesses but food for thought. Nobody knows how rich Putin is but one guesstimate is $200bn.

The world luxury goods business was estimated at $305bn in 2021 of which LVMH accounts for around 22pc. Arnault owns around half of LVMH so he personally controls around 11pc of the global luxury goods market. If you look at the history of LVMH it is a blizzard of acquisitions and deals by a man who is not only a master of mergers and acquisitions but brilliant at managing and promoting the businesses he acquires. He has help, some 174,000 people, work for LVMH but what a guy to have at the helm.

His CV also includes serious attempts to acquire major rivals like Gucci and Hermes from both of which he walked away with substantial profits. The interesting question is why is LVMH doing so well now and not just LVMH. Other luxury goods shares like Hermes and Brunello Cucinelli are doing well. Burberry too is looking interesting.

Part of the explanation is that in the first nine months of 2022 LVMH revenue grew 28pc of which 20pc was organic. Two thirds of this revenue is generated in the USA (26pc), Asia excluding Japan (32pc) and Japan (7pc). France is just seven per cent.

LVMH is a fantastic business which is firing on all cylinders and describes the outlook as for more of the same.

2022 Outlook: LVMH is confident in the continuation of current growth and will maintain objective of further strengthening its global leadership while staying vigilant in context of macro and geopolitical uncertainties

Q3 2022, 11 October 2022

It seems likely that the full year 2022 figures, due on 26 January (how quick is that) are going to be amazing and the outlook good too, especially as Xi takes the brakes of the Chinese economy and after the pronounced weakening of the euro v the US$.

Arnault was born in 1949 so he is still only 73 which seems positively young to me. Part of the key to the success of LVMH is its incredible pricing power. The more expensive its stuff is the more is wealthy customers want it. I see it in myself. I am reassured when things are expensive. These top luxury goods companies don’t have sales either so is it is no good waiting for Black Friday to buy a cheap Louis Vuitton bag.

This pricing power means that against a background of solid demand LVMH has Apple-style operating margins approaching 30pc. Is the company a license to print money. Probably! And it keeps on growing by acquisition as well as organically. The global reach makes this easier to do because in its home country of France its share is relatively small so who worries about competition considerations while in other countries where its share is bigger there are no domestic rivals to protect.

Is there any end to this process? Who knows. LVMH could buy Ferrari. It could have a stab at buying Tesla but that would involve issuing shares which Arnault would not like. Apple might be too big a mouthful unless they did it as a reverse takeover with Apple buying LVMH, Arnault becoming CEO and Tim Cook going back to being operating director. What we do know is that whatever these guys buy they turbocharge the performance. Imagine Tesla cars sexed up by the LVMH luxury goods specialists or even merged with Ferrari and with serious marketing. A Ferrari badged Tesla would sell like no tomorrow.

Another spectacular luxury brand is Rolex, an intensely secretive private company which had sales of around $8.5bn in 2021. If I use a similar valuation to that used for Ferrari and I can imagine that Rolex is more profitable than Ferrari this still values Rolex at around 110bn euros. I am sure Arnault would love to buy Rolex but that is not going to happen so he bought Tiffany instead.

This is probably fantasy , about Ferrari, Tesla and Apple, but there is no area of luxury goods spending where these guys don’t take an interest. They are into hotels and property development. Arnault started as a property developer and then he bought a luxury goods business for one euro which five years later made a profit of euro112m. He is not your average guy!

He then conceived the idea of building the world’s greatest luxury goods conglomerate, acquiring top brands or Maisons as they are known in the company and the rest is history (and it really is his story). What has been amazing is how, like Warren Buffett, with whom he has much in common, he has done all his deals, as far as I can tell, to be financed by cash and debt, which keeps the equity scarce, him in total control and his shares steadily climbing.

In effect, LVMH equity is another sought after luxury good like the products it makes. Hermes is much the same which is why their shares too have been star performers over the years. Incidentally LVMH has its own Hermes in the shape of Louis Vuitton, the LV bit, which is an incredible business, perhaps the best single business in the world. I couldn’t find operating profit margins just for Louis Vuitton, excluding the rest of LVMH, but Hermes has operating profit margins of 40pc which gives you an idea.

Does all this make LVMH a 10/10? It probably does. The ‘something new’s are the weakness of the euro in which the group’s turnover is denominated and the waking up of the Chinese economy after a period of ferocious lockdowns.

The impact of China on the global luxury goods market is a true phenomenon.

Around 21pc of global consumer spending on luxury goods in 2021 came from China. According to Bain & Company, the Chinese are expected to become the world’s largest luxury market by 2025.

In its China Luxury Report 2021, the global management consulting firm points out that the domestic sales of personal luxury goods in the Chinese mainland notched up a 36pc year-on-year increase to nearly 471bn yuan (US$74.4bn) in 2021. The sales figure had almost doubled when compared to that of 2019.

Categories of luxury goods grew at different paces in the Chinese market last year. Leather goods grew the fastest, with a growth rate of about 60pc, followed by fashion clothes and jewellery.

Bain & Co., management consultants, 26 January 2022

Strategy

There are signs of life in my list of benchmarks with around a quarter of the stocks in the list showing Coppock indicators on the turn from negative to positive. This fits in with my expectation that the US indices will see Coppock buy signals in the first half of 2023 and maybe sooner rather than later.

Some important charts still look scary but that is hardly surprising with the overall stock market still trading close to the lows. I also suspect that we may have become too statistical in our assessment of what is happening in the world. As I walk around in Kensington and Saffron Walden there is no sign of recession. These may be privileged areas but the 1930s this ain’t and as we see above luxury goods shares are hitting new all-time peaks. It is a strange time.

The truth is that there can be a massive disconnect between what happens in stock markets and what happens in the real economy. A famous joke is that the stock market predicted seven of the last two recessions. Investors are as flighty as horses and when one or two grow nervous the whole herd can panic. The decade running up to 2022 saw a massive revaluation of shares in fast-growing companies, especially in technology. Much of that revaluation has been unwound but it is more than possible that the sector will continue to deliver strong growth and luxury goods shares are like a royalty on global wealth creation but multiplied. I can’t remember the exact numbers but a one per cent increase in global GDP creates say a 10pc increase in the number of millionaires. In major cities the time may be coming when all property owners will be dollar millionaires.

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