Is LVMH Stock a Buy?

I started a position in LVMH (LVMUY 1.13%), the world's largest luxury goods company in February 2019. At the time, I admired its robust growth in revenue and profits, its natural insulation from macro headwinds, its strong cash flows, and its dependable dividend.

I accumulated more shares of LVMH over the past two years, and I'm currently sitting on an unrealized gain of over 60% as the stock hovers near all-time highs. That rally was surprising since LVMH faced unprecedented headwinds -- including sales disruptions during the civil unrest in Paris and Hong Kong, higher tariffs in the U.S. market, and widespread store closures during the pandemic.

LVMH also confused investors with its takeover bid for Tiffany & Co. (TIF) -- which was initially announced last November, delayed twice during the pandemic, briefly abandoned, then modified at a lower price in October. The merger is now expected to close by early 2021.

Image source: Louis Vuitton.

I don't plan to sell my shares of LVMH anytime soon, but is it the right time for investors to start a fresh position in the French company? Let's dig deeper into the fundamentals to find out.

Understanding LVMH's business

LVMH owns 75 main brands split across five main businesses -- fashion and leather goods (46% of its revenue in the first nine months of 2020), selective retailing (24%), perfumes and cosmetics (12%), wines and spirits (11%), and watches and jewelry (7%).

LVMH's organic revenue, which excludes acquisitions, divestments, and currency headwinds, has risen across all five segments over the past few years. However, all five segments fell off a cliff in the first nine months of 2020 as the pandemic shut down the company's stores worldwide:

* = First nine months only. YOY = Year over year. Source: LVMH.

Leather goods and spirits are making a comeback

Those declines look horrendous, but LVMH's fashion and leather segment recovered in the third quarter, with 12% year-over-year revenue growth, as its wine and spirits revenue dipped just 3%.

LVMH attributed its rising fashion and leather revenue to the resilience of its Louis Vuitton, Dior, Fendi, Loewe, and Celine brands. Those houses all target high-end consumers who easily weathered the COVID-19 crisis, so there was plenty of pent-up demand when their stores finally reopened.

The wine and spirits segment's recovery was led by Hennessy cognac, especially in the U.S. market, and the integration of two new high-end wines -- Château d'Esclans and Château du Galoupet -- into Moët Hennessy.

Its other business are still struggling

But LVMH's other three businesses are still struggling. The selective retailing segment is still bleeding as store closures and social distancing measures throttle Sephora's sales. And its DFS chain, which relies on international travelers in airports and resorts, is still being choked by travel restrictions.

Image source: Sephora.

The perfumes and cosmetics group saw steady growth in online sales and a "significant improvement" in its brick-and-mortar stores during the third quarter, but global demand for makeup and skincare products remains soft with more people staying at home. The decline in travel also curbed purchases by international travelers.

LVMH's sales of watches and jewelry warmed up in China, but its declines across other markets offset that growth. Demand for its brands -- including Bulgari, Tag Heuer, and Chaumet -- was already tepid last year, and LVMH is betting on Tiffany to boost its growth. The size of the watches and jewelry segment should roughly double after that long-awaited acquisition finally closes.

When will LVMH start growing again?

Analysts expect LVMH's revenue and earnings to decline by 10% and 37%, respectively, this year. But next year, they expect its revenue and earnings to rise 18% and 67%, respectively, as the pandemic ends and it absorbs Tiffany.

Based on those forecasts, LVMH trades at 36 times next year's earnings. That valuation seems a bit frothy relative to its growth, but it should contract quickly as the company starts growing its earnings again.

Investors should also remember that LVMH easily weathered the Great Recession and the retail apocalypse over the past decade, in part because its affluent shoppers are far less exposed to macro headwinds than middle-class shoppers. It also reportedly destroys its own excess inventories instead of clearing them out with markdowns, which shields its brand appeal, pricing power, and gross margins.

LVMH is still worth buying

We should always be skeptical of analysts' forecasts since no one knows when the COVID-19 crisis will finally end. Nonetheless, the growth of LVMH's core brands should accelerate when life finally returns to normal, and investors might regret not accumulating more shares when the chips were down.