Equity Report LVMH

Date: 30/04/18 Current Price: 289.30€ Target Price: 206€ (-29%)

Ticker: LVMH Market Cap.: €145.449B Recommendation: Sell

FIGURE 1 – MARKET PROFILE Business Description

Market Profile LVMH is an European multinational luxury goods conglomerate, headquartered
Closing Price in Paris, France, and listed on Euronext Paris. Currently, the firm has a portfolio
289.30
(€) of 70 brands in all five major sectors of the luxury market: Wines & Spirits,
52 Week H/L Fashion & Leather Goods, Perfumes & Cosmetics, Watches & Jewelry and Selective
289.30/211.90
(€)
Retailing. It is present in 70 countries, with Asia and the US having been the
Average
Volume (3M)
654,067 Mn regions with the highest revenue growth in 2017 - 28% and 25%, respectively.
Shares The industry is characterized by moderate growth (5% CAGR) and significant
505.09Mn
Outstanding
barriers to entry under the form of high entry costs and very reputable players.
P/E 28.42x LVMH faces competition from luxury brands including Richemont, Kering, Ralph
SOURCE: REUTERS Lauren and Herms, but the reputation of its brands allows it to lead them in both
size and growth, whilst maintaining profitability levels significantly above sector
average (16% ROC vs around 11% for the sector, net of cash).
2017 2018F 2019F 2020F 2021F 2022F
FIGURE 2 – SHARE PRICE AND VALUE Revenues (€Mn) 42636 44767 47006 49356 51824 54415
Operating Margin 19% 18% 18% 18% 18% 18%
320 Price
Net Profit Margin 12% 12% 13% 13% 13% 13%
280 €289
240 ROE 17% 16% 17% 16% 16% 16%
200 ROC 14% 14% 14% 14% 14% 14%
Value WACC 6% 6% 6% 6% 6% 6%
160
€205
120 EVA (€Mn) 3255 3047 3521 3574 3725 4027
80 Net Debt/EBIT 1.43x 0.83x 0.87x 0.90x 0.93x 0.96x
40
SOURCE: TEAM ANALYSIS
0
1/3/11
1/3/12
1/3/13
1/3/14
1/3/15
1/3/16
1/3/17
1/3/18

SOURCE: TEAM ANALYSIS

Investment Analysis
SOURCE: YAHOO FINANCE AND TEAM ANALYSIS
Our analysis suggests LVMH is considerably overvalued at 289.30€, the closing
price at 30/04/2018. Therefore, we issue a sell recommendation for LVMH shares
FIGURE 3 – DCF VALUATION SCENARIOS based on a DCF estimated share value of 206€ supported by a peer derived
multiple valuation yielding a share value of 222€. The main assumptions behind
DCF Valuation Scenarios
this valuation include (1) a stable operating margin of 18% until 2022, (2) the
Optimistic –3.65% presence of perceived strong, sustainable competitive advantages (namely brand
growth in perpetuity; 240€
name and large financial capabilities) and considerable barriers to entry
ROC=10%
Base - 2.65% growth (substantial investment in production facilities required, reputation and
in perpetuity; 206€ customer loyalty), which allow LVMH to generate consistent marginal excess
ROC=9% returns of 2% in perpetuity, and (3) a growth rate in perpetuity of 2.65%.
Pessimistic – 1.65%
growth in perpetuity; 188€ Our optimistic scenario (figure 3), considering a higher economic growth rate and
ROC=8% superior marginal returns on new projects in perpetuity (10% vs 9%) yields an
SOURCE: TEAM ANALYSIS intrinsic value of 240€ - 17% below the latest market price, which adds
confidence to our sell recommendation.

Corporate Finance Department | www.fepfinanceclub.org

 P&L
FIGURE 4 – MULTIPLE VALUATION

Multiple Valuation (Median) (€Mn) 2017 2018F 2019F 2020F 2021F 2022F
Revenues 42636 44767 47006 49356 51824 54415
P/E 36,3x
EBIT 8113 8058 8461 8884 9328 9795
EV/EBIT 4,0x Interest
179 334 194 212 230 187
MtB 3,6x Expense
EBT 7934 7724 8267 8672 9098 9608
Tobin-Q 3,2x
Tax Rate 29% 33 % 28% 28% 27% 25%
Equity Value
112025 Net Income
(€Mn) 5616 5167 5952 6244 6605 7159
(before MI)
Share Value (€) 222 SOURCE: TEAM ANALYSIS
SOURCE: TEAM ANALYSIS

Balance Sheet
FIGURE 5 – DCF VALUATION ($Mn) 2017 2018F 2019F 2020F 2021F 2022F
DCFFIGURE 5 – DCF
Valuation VALUATION
(Base Scenario) Fixed Assets 43434 44022 46223 48535 50961 53509

Enterprise Value (€Mn) 110060 Working -6764 -6715 -7051 -7403 -7774 -8162
Capital
Cash and NOA (€Mn) 5166
Non 1428 1428 1428 1428 1428 1428
Debt (€Mn) 11576 Operating
Equity Value (€Mn) 103650
Assets
Cash 3738 836 2556 4359 6281 8435
Shares Outstanding
504 Equity 30260 32844 35820 38942 42245 45824
(Mn)
Debt 11576 6727 7337 7976 8652 9386
Share Value (€) 206
SOURCE: TEAM ANALYSIS
SOURCE: TEAM ANALYSIS

FIGURE 6 – WACC
Cash Flow Statement
WACC
(€Mn) 2018F 2019F 2020F 2021F 2022F
Risk-free Rate 0.59% Net Income 5167 5952 6244 6605 7159
Country Risk - ΔWC -49 336 353 370 389
1.40%
Premium
S-OURCE
Δ FA: TEAM ANALYSIS -588 -2201 -2311 -2427 -2548
Beta 0.88
SOURCE: TEAM ANALYSIS + Δ Debt -4849 610 639 676 733
Equity Risk Premium 5.19% -Dividends -2584 -2976 -3122 -3303 -3579
Cost of Equity 6.56% + Δ Equity (Issue) 0 0 0 0 0
+ Δ NOA 0 0 0 0 0
Default Spread 0.90%
= Δ Cash
SOURCE: TEAM ANALYSIS
-2903 1721 1803 1921 2154
Cost of Debt 2.89%
SOURCE: TEAM ANALYSIS
WACC 6.17%

SOURCE: TEAM ANALYSIS, DAMODARAN

Corporate Finance Department | www.fepfinanceclub.org

Analyst Email LinkedIn
Andreia Silva andreiasousa@live.com.pt https://www.linkedin.com/in/ andreia-
sousa-silva/
Director Email LinkedIn
Miguel Guimarães migftg95@gmail.com www.linkedin.com/in/miguelftguimaraes

Copyright © 2018, FEP Finance Club, All rights reserved.

This document has been prepared by FEP Finance Club. This document is provided solely to you and at your
specific request. In consideration of FEP Finance Club providing you with this document, you hereby
acknowledge and agree to the following terms and conditions:
The Information represents our view as of the date hereof and is subject to change and/or withdrawal at any
time without notice. The Information may be based on (a) data that may no longer be current, (b) estimates
that may involve highly subjective assessments and (c) models that may change from time to time and be
different from the assumptions and models used by other persons.
The Information is not intended as an indicative price or quotation and the actual market price of the security
referred to herein can only be determined when and if executed in the market. Consequently, the Information
may not reflect hedging and transaction costs, credit considerations, market liquidity or bid-offer spreads.
FEP Finance Club does not guarantee the accuracy, reliability or completeness of the Information (including
any assumptions, modelling or back-testing used to develop such Information), which may have been
developed based upon trade and statistical services or other third-party sources. Any data on past
performance, modelling or back-testing contained herein is no indication as to future performance.
The Information should not be the basis for determining the value of any security or in making any investing
decision.
The Information is illustrative. It is not intended to predict actual results, which may differ substantially from
those reflected in the Information, and no assurances are given with respect thereto. FEP Finance Club does
not represent that any Information in this document directly correlates with values which could actually be
achieved now or in the future. The value of any investment may fluctuate as a result of market changes.

Visit us on:
https://www.fepfinanceclub.org
https://www.facebook.com/FEPFinanceClub/
https://www.linkedin.com/in/fepfinanceclub/

Partners

Corporate Finance Department | www.fepfinanceclub.org