LVMH Stock Analysis: Impact of Potential U.S. Recession

LVMH Stock Analysis: Evaluating the Impact of a Potential U.S. Recession

In the realm of analyzing various companies, there is a common thread among the businesses that catch my attention: they are high-quality enterprises with a robust economic moat. These types of businesses typically outperform the overall stock market in the long term, making them a cautious choice for shorting. The strong economic moat surrounding these businesses contributes to their resilience, leading investors to assign high valuation multiples to their stocks. With these factors in mind, investors should exercise caution when considering shorting these stocks.

However, there are instances where I have given a “Sell” rating to companies, albeit with the caveat that I would sell the stock as a shareholder rather than shorting it. One such company that has received a “Sell” rating from me multiple times in recent years is LVMH Moet Hennessy – Louis Vuitton (OTCPK:LVMHF). While LVMH is undoubtedly a remarkable business, I have expressed concerns about the stock being overvalued. In my previous articles, I maintained the view that LVMH was still overpriced, and since then, the stock has decreased by approximately 15%. In comparison, the S&P 500 surged by 34% during the same period, further indicating potential overvaluation.

As we delve into the half-year results for fiscal 2024, which LVMH unveiled on July 23, 2024, it becomes evident that the numbers were less than stellar. Revenue witnessed a 1.4% year-over-year decline, falling from €42,240 million in H1/23 to €41,677 million in H1/24. Operating profit also took a hit, dropping by 8.2% year-over-year from €11,574 million to €10,624 million. Additionally, diluted net earnings per share saw a 14.1% year-over-year decline from €16.93 in H1/23 to €14.54 in H1/24. The silver lining amidst this downturn was the growth in operating free cash flow, which surged by 74.2% year-over-year from €1,797 million in the first six months of 2023 to €3,130 million in the first six months of 2024.

Breaking down the performance of different segments, we observe varying outcomes. The Fashion & Leather Goods segment, which is a crucial revenue generator for LVMH, experienced a slight revenue decline of 1.8% year-over-year to €20,771 million in the first half of 2024. Profit from operations within this segment also decreased by 5.9% year-over-year to €8,058 million.

Wines & Spirits reported declining numbers in the first half of 2024, with revenue dropping by 11.8% year-over-year to €2,807 million and profit from operations declining by 25.7% year-over-year to €777 million. Similarly, Watches & Jewelry witnessed a revenue decline of 5.1% year-over-year to €5,150 million, accompanied by a profit from operations decline of 19.5% year-over-year to €877 million.

On the flip side, Perfumes & Cosmetics recorded a slight revenue increase of 2.7% year-over-year, reaching €4,136 million in revenue in the first six months of 2024. Organic revenue growth for this segment was even higher at 6%, although profit from operations dipped slightly from €446 million in H1/23 to €445 million in H1/24. Selective Retailing reported growth in both revenue and operating profit, with revenue climbing by 3.3% year-over-year to €8,632 million and profit from operations increasing by 6.9% year-over-year to €785 million.

China, a significant market for LVMH, is currently facing economic challenges, with Asia (excluding Japan) witnessing a 10% revenue decline in the first half of 2024 and a 14% decline in the second quarter. The slowdown in China’s growth is evident, with GDP growth dropping to 0.7%, a stark contrast to the double-digit growth rates experienced pre-pandemic. Retail sales growth in China has also been dwindling, nearing zero levels. The prevailing narrative suggests that once China rebounds, luxury companies like LVMH will regain momentum. However, the severity of China’s economic slowdown raises concerns about the impact on LVMH’s performance.

While China’s economic challenges are on the forefront, the looming threat of a recession in the United States cannot be overlooked. Various indicators point towards an impending economic downturn, with warning signs becoming increasingly pronounced. Factors such as the potential reinversion of the yield curve, escalating bankruptcies, and a surge in initial claims for unemployment signal a troubled economic landscape. The Sahm Rule Recession Indicator, historically reliable in predicting recessions, underscores the gravity of the situation. The Federal Reserve’s anticipated interest rate cuts further underscore the likelihood of an economic downturn.

Amidst the economic uncertainties, analysts remain optimistic about LVMH’s growth prospects, foreseeing a CAGR of 6% in revenue between fiscal 2023 and fiscal 2033. However, these estimates may fall short in light of the impending recessionary pressures. As historical data indicates, recessions have a profound impact on the luxury goods market, hinting at a potential slowdown or contraction in the near future.

When assessing LVMH’s intrinsic value, current valuation metrics appear reasonable, with the stock trading at 28 times earnings and 24 times free cash flow. However, a discounted cash flow calculation reveals that the stock is still overvalued, despite recent price corrections. The assumptions made in the valuation model, including optimistic growth rates and benign recession impacts, underscore the challenges ahead for LVMH.

In conclusion, while LVMH’s stock may be inching closer to its intrinsic value, the shadow of an impending U.S. recession casts a pall over its future performance. As the luxury goods market braces for potential headwinds, prudent investors may opt to exercise caution when considering investments in LVMH and similar luxury stocks. While the stock is no longer a clear “Sell,” it remains a risky bet in the current economic climate. With uncertainty looming on the horizon, strategic decision-making and a cautious approach are paramount in navigating the turbulent waters of the luxury goods sector.