LVMH

Stock price: €92
Conclusion: Luxury revival coupled with positive forex lead to a strong year. We now look for +35% EPS growth vs +27% previously. We raise our valuation target up to €109-112 per share.

H1: sales up 16% to €9bn (+14% organic H1-+15% Q2) -EBIT +33%-net earnings +53% to €1050m. Management “very confident” but declined to give guidance for the full year.

H2 will slightly decelerate.
-We look for +8% organic sales in H2 driven by Louis Vuitton, the watches and selective retail. Visibility looks lower in wines and spirits. By region, Asia and the US should keep a double digit growth momentum while Europe could slowdown and Japan stay negative.
-Forex impact should increase to +4.5% for the full year (vs +2% in H1), based on current exchange rates.

We look for 21.4% operating margin for the full year (+170bp)
-The gain in H2 should be less pronounced than H1 (+120bp) owing to tougher comps. Margins held up well last year in H2, down only 70bp vs 2008. We also expect advertising and promotion to continue to expand faster than sales (+18% in H1), notably at Moet-Hennessy, Dior and also Louis Vuitton. Last, visibility on administrative expenses remains low following a higher charge than expected in the first half of the year.
-Net earnings could jump 35% to €2.4bn (EPS €5.0) helped by lower net financial income. FCF improved €800m to achieve €1145m in H1. We look for €2.4bn for the year and expect net debt to fall below €2bn by the end of the year.

LVMH trades at 18.4x and 8.9xEV/EBITDA based on our 2010 estimates. Our revised numbers suggest a valuation around €109-112 per share, offering 18%+ upside potential.

LVMH

Stock price: €90.1
Conclusion: . We further upgrade our valuation range (€101-€105 per share) to account for a strong start of the year. Low inventories, improved sell-out combined with positive forex lead us to expect 25%+growth in EPS this year.

Q1 sales: 4bn, up 11% reported, +13% organic. No guidance given for 2010.

Return to double digit growth in sales for the full year looks feasible
LVMH should benefit from the conjunction of the end of destocking combined with improved sell-out in wines and spirits, perfumes and watches, continuing momentum at Louis Vuitton and a positive forex impact.
-Q1 benefited from easy comps (sales down 7% in Q1 last year), notably in wines and spirits (+20%), watches (+34%) and perfumes (+12%) which suffered from sharp destocking in the first six months of last year. Except for Japan (-7%), all regions returned to double digit growth (Asia +20%, US+20%, Europe +11%) in Q1. Sales growth for champagne (+33% in Q1) should not be extrapolated, as sell-in were above sell-out numbers implying restocking initiatives, notably in the US.
-Comps will be less favourable in H2 and organic growth should come down to 9% for the full year, implying 7%+ growth for the next 9m vs -3% organic sales from April to Dec last year. Champagne shipments should resume growth by around 10% this year. Watches will also benefit from low inventories coupled with improved demand in Asia and the US. Innovation continues to drive cosmetics sales. Last, Louis Vuitton’s return to double digit organic growth is driven by products, communication and store openings.
-We project a positive swing in Forex from -2% in Q1 to +3% for the next 9m, based on current rates. As a result, full year sales will be further boosted by around +2% positive forex impact.
-Margin could bounce back to 20.3% of sales vs 19.7% last year, helped by positive leverage coupled with tight cost control, including marketing spending. Margin recovery at Moet-Hennessy will be held back by lower yields in champagne combined with limited pricing. Dollar hedging rate for 2010 should be less favourable than in 2009.
-We upgrade our estimates from €4.42 to €4.71 (+6.5%) implying 27% EPS growth for 2010.

LVMH trades at 19.2xP/E and 9.8xEV/EBITDA based on our 2010 estimates. We continue to find the stock attractive notwithstanding its strong performance (+20%) since our last update (February 8th). Our revised DCF suggests a valuation around €105 per share. Q1 sales confirm that visibility has improved, both from an inventory and sell out standpoint. We expect a further 15% return in the coming months. We think Christian Dior, the main holding company of LVMH (42.4% of shares and 58% of voting rights) looks even more attractive, based on its 21% discount to adjusted net asset value.

Long Christian Dior at time of writing.

LVMH

Stock Price: €74,9
Conclusion: Risk reward turning attractive. We are revising up our valuation range (€93-€97 per share) as a result of continuing momentum at Louis Vuitton, improved visibility on the wholesale front, a weaker Euro and improved cash flow management. We find the stock price attractive and look for 20%+ return.

F2009: sales down 1% to 17bn (down 4% organic) in line with est. EBIT down 8% ( better than our-10% forecast). EPS down 13% to €3.70 (€3.81 estimated). No guidance given for 2010 except that LVMH will reinforce its leadership.

Altough the environment remains uncertain, we expect a return to 5-6% growth in 2010.
-We have no reason to forecast slower organic growth for Louis Vuitton in 2010 (+7% organic estimated in 2009 in a recession period), in a context of a gradual macro-economic improvement. LV will continue to benefit from innovation, increased communication vs last year, new store openings albeit at a slower pace than in the past. In addition, we feel that the shift of Vuitton’s image towards greater authenticity and craftmanship is well suited to the post crisis demand.
-Retailer inventories look under control which bodes well for LVMH’s businesses depending on wholesale: wines and spirits, watches, jewellery and perfumes. According to Moet-Hennessy, destocking was over end of December. However, we assume low single digit growth rate in champagne and cognac which might suffer from continuing down trading this year. We also expect low single digit growth in perfumes, which is overexposed to Europe (56% of sales vs 35% for the group). Watches could return to mid single digit growth (Q4+5%), helped by easy comps in the US and increased sales in China.
-Store openings (80-90 new stores +10%) should help to boost Sephora sales, while DFS revenues become increasingly dependant on Chinese clients.
-Reported numbers might benefit from 1-2% positive forex impact based on current rates.

Margins could bounce back by 60bp to 20.6% (-140bp in 2009)
-Notwitstanding comps with favourable hedging rates in 2009, the weakening of the euro should improve the cost of goods and lead to positive translation impact.
-We expect Vuitton, watches and retail to benefit from positive leverage.
-We remain cautious for wines and spirits, as we think that down trading is not over and might prevent Moet-Hennessy to restore its margins.
-We expect SG&A to increase at a slower rate than sales unlike 2009 when they rose by 1% excluding fx vs -4% sales. As to marketing and selling expense , we forecast faster growth owing to a rebound in communication expenses (down 110bp last year).

EPS (+19.7% to €4.42) could be further enhanced in 2010 by lower restucturing charges coupled with improved financial costs (net debt down almost €1bn end of december). We forecast free cash flow to be close to €2bn, slightly less than in 2009 as a result of a slight working capital outflow resulting from higher sales.

Following recent market turmoil, LVMH trades at 16.9x P/E and 8.7xEV/EBITDA based on our 2010 estimates. Our DCF suggests a valuation of around €97 per share. We are impressed by management’s handling of the crisis last year. Notwithstanding financial uncertainty, visibility seems slightly better today both from a macro economic perspective and inventory standpoint. Consequently, we find the risk reward attractive and look for a 20%+ upside potential. We also welcome management comment assuring that it will focus on internal growth.

LVMH

Stock Price: €73
Conclusion: Stock price close to our valuation range (€75-80 per share). Current P/E look fair considering the resilience of Vuitton but also the low visibility affecting the rest of the portfolio.

Q3 sales down 0.6% reported and 3% like for like. No guidance given for the year.

Less de-stocking in Q3 but continuing weak demand for luxury products.
As expected, like for like growth improved from -7% in H1 to -3% in Q3 (-6% nine months). The bulk of the improvement comes from the segments which fared the worst during H1, watches, spirits and perfumes were less impacted by de-stocking in Q3. The activities which proved more resistant in H1, leather goods and retail, did not really improve in Q3. Vuitton was the exception with sales up around 7% like for like slightly up versus H1.
Q4 will face an easier comparison base (last year, sales were down 1%) notably in wines, spirits and in watches. According to the CFO, champagne and watches will continue to be affected by high inventories. In addition, reported numbers will be impacted by a negative forex swing, leading to -1.5% sales for the year.
We expect EBIT to decline by around 10% and EPS to fall 9.5% to €3.81 in 2009.

A quick turnaround in 2010 looks unprobable.
China might again drive sales growth next year. Chinese people make up around 18% of Vuitton sale and 15% of cognac revenues.
However, we do not expect a strong rebound in Europe, the US and in Japan which still account for the bulk of the spending. According to Bain experts, luxury sales could grow by only 1% next year, following 8% decline in 2009. Much of the industry’s upturn will depend on aspirational middle class customers who suffered from the crisis. Wines and spirits could grow faster helped by an easier comparison base.
Reported growth will also be held back by weaker dollar related currencies. We look for 2% growth in sales and 9% EPS to €4.17 per share.

M&A initiatives ?
We would be surprised by the sale of MH stake to Diageo at the bottom of the cycle. It would make sense if LVMH could acquire Hermes, Bulgari or Richemont…which are not for sale.
We think that LVMH should further concentrate resources on its key brands, Vuitton, Dior, Moet-Hennessy, Tag Heuer and Sephora. We are less convinced that investing in Kenzo, DKNY, Loewe, Celine or DFS will create shareholder value.

LVMH trades at 19.1x and 17.5x P/E based on our 2009 and 2010 estimates.
We estimate the valuation range between €75-80 per share, which does not leave much upside. Further rerating would require a return to high single digit growth momentum in sales, which seems difficult to achieve next year.

LVMH

Stock Price : €68.9
Conclusion: Fully priced. Lack of visibility prevent us from turning positive on the stock. H1 release led us to further downgrade our EPS for 2009, while positive forex should fade away.

H1 Results: sales flat (reported) and down 7% like for like. EPS down 22% in H1, no guidance given for the rest of the year.

A turnaround in sales looks unlikely in the next 6-12 months.
-Moet Hennessy’s premium positioning makes it more cyclical than its peers in spirits and more vulnerable to the downturn. Nevertheless, following the expected end of destocking we expect sales in H2 to be more in line with sell out figures (according to management, sales in H1 went down 13% adjusted for destocking vs 22% reported). As to watches, their decline is more or less in line with the exports of the Swiss watch industry, which kept struggling in July-August. We expect both Louis Vuitton and Sephora to post positive growth in H2 and market share gains helped by the good resistance of their distribution network and strong innovation. Last, LVMH perfumes should also continue to gain share in a depressed prestige market.
-Positive forex impact could fade away in H2 vs +6% in H1, and turn negative in 2010 (-2.5%) based on current spot rates.
-Consequently we are looking for a slight decline in sales this year (-1.5%) and limited increase next year (+2.5%).

LVMH’s cost structure leaves little room for manoeuvre to cope with slower revenue growth
- 180bp deterioration of the gross margin seems to indicate that LVMH did not benefit from the strengthening of the dollar and the yen in H1, which we find surprising.
-In spite of a 5% reduction in operating costs , personnel costs (20.7% of sales) and renting costs (6.6% of sales) rose in H1 by 14% and 12% respectively , which seems high, especially compared with flat reported sales.
-Advertising costs are more flexible, they went down 12% in H1 to represent 10.7% of sales, down 160bp vs last year. However, we do not expect this trend to be durable given the premium positioning of the group and the focus on innovation.
-Positive forex impact on margins (+70bp in H1) should fade away in the second half of the year, offset by further cost reductions at Moet Hennessy, Sephora and in watches. Consequently, we are looking for a 12% decline in operating earnings in 2009, and 13% fall in EPS.
-We expect the free cash flow to increase to €1.57bn (+18%), helped by improved working capital and lower capex.

The stock trades at 18.5x and 16.9x our 2009 and 2010 estimates. We estimate the FCF yield at 4.8%. P/E valuation looks compelling from a historical standpoint. However, we feel that a further rerating would require a better visibility in short term earnings, and also improved long term outlook. We do not underestimate the influence of booming sales in emerging markets (roughly 30% of sales), but we are not sure that this should be enough to compensate for subdued sales in Japan, the US and in Europe. A return to 20x P/E would require to resume almost double digit growth in sales, which seems very ambitious in light of the new “austerity”.

LVMH

Stock price: €51,9
Conclusion: Too many risks, not enough reward

Q1 sales down 7% like for like, up 0,4% on a reported basis. No guidance for 2009.

LVMH’s CFO was right, there are two ways to look at these numbers: either focus on the unprecedented decline in wines and spirits (-22%), watches (-41%) and perfumes (-11%) or underscore the exceptional performance of Louis Vuitton (mid single digit growth) and Sephora in such a challenging environment.

Despite zero visibility, let’s try to make forecasts ! first, on the organic growth front, we look for a 4,5% decline this year, assuming a return to 14% decline in wine and spirits for the year, 25% decline in watches and 10% fall in perfumes, partly offset by 3% growth at LV and stable growth in retail. Second, on the forex front, assuming that spot rates remain unchanged, which will certainly not happen, we end with a 4% positive impact for the year. As result, total sales could be flat this year, largely helped by currency.
Bottom line is even more difficult to predict, notably for wines and spirits. Management succeeded last year in improving margins despite lower volumes in cognac and champagne. We expect the “strict management of costs” to lead to savings in the commercial and administrative fields, while renting expenses could also continue to slow down. EPS could be down 6% in 2009.

We value the stock at €56, based on DCF, using 10% wacc and 3% terminal growth rate. To make it short, we think the upside potential does not justify the current risk.
The group just denied press reports suggesting that it might divest its wines and spirits division. We fully understand the long term logic of such a move for both LVMH and Diageo but we think the timing would not be the best for LVMH and it is urgent to wait…