3 French share ideas – why investors should care about the next Olympic host

The Olympic torch has been handed to Paris. But rather than being reminded of the City of Love’s famous food, architecture and history, we think now could be the time to consider what France can offer investors.

The French market houses some well-known names, including Airbus and, unsurprisingly, some famous luxury brands. But there’s also a host you’ve probably never heard of.

For those looking to diversify their investments to include alternative regions, France could be worth consideration.

This article isn’t personal advice. If you’re not sure if an investment is right for you, ask for advice. All investments and any income they produce can fall as well as rise in value, so you could get back less than you invest. Past performance isn’t a guide to the future.

Investing in individual companies isn’t right for everyone – it’s higher risk as your investment is dependent on the fate of that company. If a company fails, you risk losing your whole investment. You should make sure you understand the companies you’re investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio.

Vivendi – music to investors’ ears?

With a market capitalisation of €34.6bn, Vivendi is no small fry. This entertainment and media giant owns 80% of Universal Music Group and television and cinema business Canal+. Plus a handful of smaller publishing, magazine and video game businesses.

Its biggest division, Universal Music (UMG), makes up 46% of revenue, and is a defensive source of income in our opinion. The world will always want music. And even as companies like Spotify and other streamers change how we consume our entertainment, songs still need producing. This helped feed into a 14% rise in group revenues in 2019, and growth of over 7% is expected this year.

Analysts expect UMG’s revenues to climb steadily over the next few years – though this will likely be tempered compared to the 10% growth analysts are expecting this year.

We’re also supportive of Vivendi’s TV media businesses. The biggest, Canal+, which accounts for €5.5bn in revenue, mostly focusses on television programmes and has over 22m global subscribers. What’s particularly notable is the exposure to emerging markets, like Asia and Africa. These are potentially good growth opportunities.

StudioCanal is more exposed to the production and distribution of shows and films, which we think is a great position to be in long-term. The world will only ever need more content.

Vivendi business by geography

Source: Refinitiv 27/08/21

We should note that net debt as a proportion of cash profits is slightly higher than we’d like at 2.0. This is by no means an unmanageable number, but we’d like it to stay stable, or even better, come down.

The valuation is also worth attention – at 21.6 times expected earnings, it’s broadly trading in line with the ten-year average. That means there could be scope for some upside, but it also means the market doesn’t seem overly excited by the near-term outlook.

Vivendi offers a prospective yield of a shade over 2.0% – as at 25 August, not a reliable indicator of future income. That’s not huge, but higher than the rate of interest being offered on pretty much any savings account. It’s also well covered by earnings, looking at last year’s figures, which means it shouldn’t be under threat. However, no dividend is ever guaranteed.

Ultimately Vivendi looks like a friendly giant and is worth consideration for investors with a long-term view. As the way we consume our media continues to evolve, we can’t rule out ups and downs along the way.

Vivendi share price and charts

L’Oréal – because it’s worth it?

The first thing to mention when it comes to this famous beauty brand is price. At 43.5 times expected earnings, the shares’ valuation is significantly higher than the ten-year average. That increases the risk of short to medium-term volatility.

It also means the market has high hopes.

Looking and feeling good will never go out of fashion, especially in today’s world of self-care and influencer culture. That’s reflected in the very strong rebound seen in L’Oreal’s luxury cosmetics business, which includes names like Lancôme skincare and Yves St Laurent cosmetics. Like-for-like sales in this division rose 28.1% at the half year and reflects 43.6% of group operating profit.

Looking ahead, this is an area that could continue to do well in our view. People are picky, and getting pickier, when it comes to what they put on their face and body. Owning some of the better trusted and well-known brands is a good place to be.

There’s also the exciting progress in the Active Cosmetics business, with underlying like-for-like sales rising over 35% at the half year. This division includes more health-centred skin care and brands, including CeraVe – which has doubled in size. You don’t need us to tell you the pandemic has heightened health consciousness, and this segment should be buoyed by a long-term shift in customer behaviour.

L’Oréal business segments

Source: Refinitiv 27/08/21

Rapidly expanding wealth in emerging markets, particularly Asia, is also working in L’Oréal’s favour. The region is the group’s second largest market. Higher levels of disposable income and aging populations is good news for the sales of makeup, serums and night creams.

Ultimately, L’Oréal’s incredible stable of brands means revenue is more reliable than for other businesses. Reliable revenues help feed into strong free cash flow, which even during the pandemic stood at an impressive €5.5bn. That gives it the firepower to buy other companies to help it grow – it’s no stranger to a well-executed bolt-on acquisition.

So what’s the catch? Competition. The rise of smaller start-ups and more personalised experiences risk taking some of the wind out of any cosmetic or consumer goods giants these days. With the current valuation in mind, the market reaction could be severe if things don’t go to plan.

Overall, we think L’Oréal – which is still partly owned by the Bettencourt Meyers family – has growth potential and the tools to fight ongoing competition.

L’Oréal share price and charts

LVMH – the world’s still hungry for fashion

LVMH’s biggest asset is its more resilient customer base. The people splashing out on Louis Vuitton, Christian Dior or a Tag Heuer have tended to be less sensitive to economic shocks or recessions. Spending should be more reliable if things take a turn for the worst.

The other source of revenue reliability are those classic brands. Selling “must have” items means sales should be stickier. That’s reflected in LVMH’s financial performance. Its biggest division by some margin is Fashion and Leather Goods, where sales of €13.9bn were up 38% on pre-pandemic levels at the half year.

Even more impressive is LVMH’s margins. You have to spend big to stay ahead in luxury fashion, and we feared margins were likely to come under pressure. But LVMH’s strong sales have put that worry to rest, and operating margins now stand at a respectable 26.6%.

LVMH’s strong position is largely the result of a stellar management team. Bernard Arnault has been CEO for almost 50 years, and owns 47.5% of LVMH’s shares. He runs the business like he personally wants it to succeed. And succeed it has – Arnault recently became one of the world’s top billionaires following LVMH’s performance.

LVMH operating margins

Source: Refinitiv 27/08/21. e = estimated

That brings us to the less good part. The flipside of having a gold-star man at the top is it increases transition risk when he leaves. There is no indication a big change is coming, but after such a long tenure it’s sensible to wonder. The market is likely to react to the news.

The other fly in the ointment is debt. Debt currently stands at a whopping €15.3bn, and that’s before the billions owed in store leases. To put that in context, debt is now equal to 35.8% of LVMH’s total equity, up from 10.9% at the end of last year. The balance sheet was stretched so the group could buy famous jewellery brand Tiffany. So far things are going well, but it’s a bit soon to tell if the price tag was warranted.

There’s a lot to like about LVMH. Keep in mind though, a price-to-earnings ratio of 29.1 means there could be some ups and downs, and investors should be prepared to take a long-term view.

LVMH share price, charts and research

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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