Luxury You Should Own

Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I have been watching luxury goods companies for a long time, but I never chose to invest in them. That said, I know they are resilient growing businesses. Now, for the first time, I am considering to include one luxury goods company in my personal equity portfolio. If I do it; I know which way I am going.

The first question that appeared in my mind when I was looking at the luxury goods corporate landscape was: should I buy a basket of stocks representing different luxury sectors or should I buy a luxury goods conglomerate at once? The answer to that question, given current market prices and sector economics, was simple: go for a conglomerate. My answer came from making a sum of the parts valuation of different luxury conglomerates and independent valuations of publicly quoted mono brands. Buying a diversified group is simply much cheaper. Besides, luxury conglomerates enjoy better economies of scale in production and distribution. Among conglomerates my personal pick was, unsurprisingly, Louis Vuitton Moet Hennessy (NASDAQOTH: LVMUY).

Even if smaller mono brand companies like Michael Kors (NYSE: KORS) enjoy faster growth, conglomerates that sell Champagne, watches, handbags, and perfumes, such as Louis Vuitton, Moet Hennessy sells for much lower multiples and still offer aggressive top line growth. The case for Louis Vuitton Moet Hennessy is special. The company owns 60 amazing brands (Louis Vuitton, Moet, Hennessy, Givenchy, and Fendi, among many others) and enjoys wonderful economics of scale. Its Q4 results are a perfect match with its high end products reflecting the enormous quality of its management. Operating profits rose 11%, and its revenues from leather and clothing segments (where half of the profits come from) were up by 14% in 2012 - although margins contracted in that area. Maybe those numbers don’t impress analysts who are used to follow companies like Michael Kors. The wild popularity of Kors’ handbags, sunglasses, and watches has produced surging sales and profit growth. As a matter of fact, since the Initial Public Offering (IPO) in December 2011, same store sales growth has averaged about 40% quarterly. Besides, for 2013, the company is expecting to more than double the EPS last year, which would be on top of a 95% increase from 2011 to 2012. But even good stories need the right price attached to them. Michael Kors, selling at a 2013 34x P/E multiple, is not a safe investment. Just take a look at what happened to Coach's (NYSE: COH) investors. Even if the company and its brand have a great story behind them, a high price requires even higher future expectations. As soon as results were below expectations, investors got hurt. Coach is down by more than 13% year to date and now trades at the reasonable multiple of 2013 13x P/E. Meanwhile, Louis Vuitton Moet Hennessy trades at 2013 17.5x P/E. Louis Vuitton Moet Hennessy's current multiple is not what I call cheap but I am sure it’s a fair price for such a wonderful collection of businesses; plus, on top of the more than 60 brands that Louis Vuitton Moet Hennessy controls, you get exposure to Hermes which probably is the most exclusive luxury goods business in the world.

As I mentioned before, given current market prices, buying Louis Vuitton Moet Hennessy over almost any luxury mono brand is a no brainier. When buying companies like Kors or Coach at P/E multiples of over 20x you are just paying too much for expected growth. Mono brands not only do not possess the market strength and distribution networks that a company like Louis Vuitton Moet Hennessy may have, but also they are not sufficiently diversified. One brand can go bust, maybe five brands can go bust on wrong strategic decisions but it’s very tough to get it wrong on more than 60 names. Louis Vuitton Moet Hennessy shares have risen 10% in the past year, reflecting how good the results have been but Kors shares have more than tripled since its IPO. If you are thinking of investing on luxury brands its best to go for the sure thing and buy Louis Vuitton Moet Hennessy.


martinzaldua has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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