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LVMH - Tiffany to join LVMH portfolio

Nicholas Hyett | 25 November 2019 | A A A
LVMH - Tiffany to join LVMH portfolio

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LVMH Moet Hennessy Vuitton SE Euro.30

Sell: 626.50 | Buy: 628.30 | Change 12.10 (1.96%)
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LVMH has agreed to acquire luxury jeweller Tiffany & Co. for $16.2bn or $135 per share. The deal is expected to complete by the middle of next year, although remains subject to shareholder and regulatory approval.

The takeover is at a premium of around 38% to Tiffany & Co.'s share price before the potential deal was first reported.

LVMH shares rose 1.6% following the announcement.

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Our View

LVMH's blockbuster portfolio of luxury brands is the product of 30 years work by CEO, Chairman and 47% shareholder Bernard Arnault. He's built LVMH into the largest luxury goods group in the world, and it's still growing.

The multi-billion dollar luxury industry is expected to grow by around 4.3% a year to 2025, helped by growth in emerging markets. These wealthy customers are prepared to pay handsomely for the latest must-haves, keeping LVMH's margins over 20%.

Cash generation is strong as a result - which in turn helps support the dividend. LVMH has grown or held the payout for over 20 years and we're hopeful this good track record can continue, although there are no guarantees. The prospective yield is 1.9%.

Given LVMH's French roots you'd be forgiven for thinking the focus is more St Tropez than Shanghai, but Asia is the group's most important geography. Not only is it the biggest, but with China alone creating two billionaires a week, it's the fastest growing.

However, ongoing trade wars and political unrest in Hong Kong are potential headwinds. So far Asian sales are holding up well, but with Chinese travellers accounting for a large slice of sales in global cities like London and Paris as well, LVMH will struggle if the Asian dragon catches a cold.

Looking long term, a catalogue of "superbrands", in everything from wine to watches, should give the group enduring appeal to customers. The combination of reliable revenues and healthy margins makes for a more defensive option for investors.

The latest addition is Tiffany & Co. - recognised across the globe for its big diamonds and blue boxes. However, Tiffany isn't cheap, and it looks like LVMH is going to take on a significant amount of debt to fund the deal. On the plus side the deal increases LVMH's exposure to the US while jewellery is one of the fastest growing areas in the luxury market, and an area where LVMH is arguably underrepresented.

Unfortunately LVMH's products aren't the only thing to command a premium price tag. The group's shares trade at a price to earnings ratio of 24.6, which is way above the longer term average. That reflects confidence in the group, but does mean the share price could fall if high expectations aren't met.

While a steep valuation and economic headwinds means the shares have the potential to be volatile in the short term, we think LVMH is in a strong position.

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Q3 revenue details (constant exchange rates) 9 October 2019

Underlying third quarter revenue rose 11%, ignoring the impact of exchange rates. That reflects growth across all divisions, and takes total revenue for the period to €13.3bn, which was above analyst expectations.

LVMH also saw good growth in the US and Europe with Asia also doing well despite challenges in Hong Kong.

Fashion & Leather Goods, the group's largest division, saw sales rise 19%, to €5.4bn. That reflects "remarkable" performances from Louis Vuitton (LV) and Dior. LV saw good growth across all its regions and business, while the new Dior boutique in Paris has been very well received.

Selective Retailing revenue reached €3.5bn, which is 4% up on last year. Sephora delivered steady growth,continues to take market share with online sales growing strongly. Despite the slowdown in Hong Kong, luxury travel retailer, DFS, continues to grow.

Momentum from flagship brands, including Dior and Guerlain saw revenue rise 7%, to €1.7bn in Perfumes & Cosmetics. Givenchy perfumes saw very strong growth of its new fragrance, L'Interdit.

Wines & Spirits grew 8%, reaching €1.4bn, thanks to a good performance in China and steady demand in the US. Champagne volumes were down slightly, but Hennessy cognac volumes increased 10%.

Bvlgari jewellery boosted the Watches & Jewellery division, particularly in its own stores. Divisional revenue reached €1.1bn, up 5% year-on-year.

Despite political unrest in Asia, LVMH is continuing with "targeted geographic expansion in the most promising markets".

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. 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 for more information.