LUXURY: Big & Agile
It is hard to believe that a sector worth €770bn could gain 18% in the first 21 trading days of the year. That would be Luxury with LVMH weighing €403bn but as agile as a start-up.
Luxury knows no limits
We are clearly at a loss when it comes to trying to explain where the future excess growth could come from that would propel such a surge in value for the sector. Asia opened its doors ages ago so the work of accommodating new territories to French and Italian taste is done, China splurged on Luxury goods as an offset for staying at home under the Covid diktat but will now probably choose to travel instead and US households are apparently splurging for a bit longer but are clearly extending themselves that bit more. One can dream of India as the next frontier for European Luxury, but this may not be enough if Chinese ladies were to change tack.
The following chart helps us understand that the Luxury sector has become such a leviathan that its 4 main stocks make up 6% of the AlphaValue total coverage market cap against 1.5% just before the GFC struck. It used to be a French index issue to have 27% of its gross market cap (not weighted by free float) represented by LVMH, Hermes and Kering. It is fast developing into a European issue as well when adding Richemont.
The rising might of 4 European luxury giants
The preceding chart shows that the inflexion point really was in 2017 when things accelerated. Money has been essentially free from 2016 meaning that a PE of 20x could reasonably be acceptable at 30X. On top came the massive investments in brands: primarily old ones being raised plus the odd acquisition.
Luxury has spent crazy amounts of money to entertain a dream at the consumer level. This is a remarkable result as investing in intangibles is by nature risky. Hats off to essentially all the industry leaders.
While spending a lot tends to be an expense of the year, it impacts the R of the ROCE whilst acquisitions boost capital employed. Interestingly investors started paying for the sector when ROCEs took off seriously which was in 2017 (see chart and forget about Covid-bound 2020)
Luxury ROCE (pink) next to market ROCE (blue)
Huge value to Luxury giants has a financial performance justification. It may also deserve a premium for being one of the few sectors that can afford to raise prices without that being called an entente as prices are an essential part of the dream component. Just as well, Luxury is not encumbered by truckloads of regulation as is the case with most big sectors.
We have predicted before that valuations can't reach the sky, wrongly so because the industry has delivered on the earnings front. For now, the 25x for 2023 is presumably cheap enough for industry fans.
