👜💎Business Overview

🎯Key Metrics

Total: 10.5/17

• +2 ✅✅ Projected Operating Margin: 25.34%
• +0 ⚠️ Projected 5-Year Revenue CAGR: 7.30%
• +1 ✅ Last 5-Year ROIC: 12.40%
• +1 ✅ Estimated Cost of Capital: 6.98% (lower than ROIC)
• +1 ✅ Last 5-Year Shares Outstanding CAGR: -0.30%
• +1 ✅ Projected 5-Year EPS CAGR: 17.34%
• +1 ✅ Projected 5-Year Dividend CAGR: 12.78%
• +1.5 ✅ Estimated Debt Rating: Aa3
• +2 ✅✅ Morningstar Moat: Wide
• +0 ⚠️ Morningstar Uncertainty: Medium

LVMH is a “status symbol”. This is shown on its high operating margin and wide moat but also on its “modest” yet solid revenue growth, given that these type of companies choose to trade their brand status by lower revenue growth, that’s not a bug but a feature. The fact that the ROIC is double its cost of capital and the debt rating is very good, gives us confidence on the company management.

Let us check if the current market prices are justified.

📈Business Valuation

To calculate the intrinsic value of the company I’ll use multiple methods:

• Discounted Cash Flows (DCF) – Intrinsic value is estimated by projecting its free cash flows over the next 10 years and discounting them to present value using the estimated cost of capital;
• EPS Growth – the fair value is estimated by projected the Earnings Per Share CAGR for the next 5 Years and then, given its current and historic values of PE, come up with a PE for the 5th Year. This will give us its price 5 Years from now using the formula: Price = EPS x PE that we then discount using the estimated cost of capital;
• Historical P/E – we assume mean reversion to the historical P/E values;
• Historical EV/EBITDA – we assume mean reversion to the historical EV/EBITDA values;
• DDM – the fair value is estimated by projecting the dividend payments across the following years and discounting them to the present value using the estimated Cost of Capital;
• Historical Dividend Yield – we assume mean reversion to the historical dividend yield;
• Historical P/CF – we assume mean reversion to the historical P/CF values;
• Historical P/B – we assume mean reversion to the historical P/B values;
• Historical P/S – we assume mean reversion to the historical P/S values.

Cost of Capital

I’ve used the latest annual financial statement of the company, the 10-Year Germany bonds as the risk free rate (given that LVMH is a French company, it uses the Euro currency, so by norm I use the most default-free country 10 Year bonds) and revenue geographic exposure to come up with its cost of capital, cost of debt and cost of equity. Also, given the fact that Moody’s provided a rating for the company I used it as the debt rating.

Cost of Capital: 6.98%.

This value will be used later as a discount rate in the valuation methods.

Please feel free to come up with your own values by using the tool I’ve used: Cost of Capital – The Fair Value Journal. It is and will ever be completely free 🙂

Discounted Cash Flows (Weight: 30%)

I’ve used the latest annual financial statement of the company, the analyst estimates for both revenue and margins and the cost of capital calculated previously.

Some notes on the inputs above:

• Terminal Revenue Growth – I’m using the risk-free rate (10-Yr bonds of Germany), because long term the company should not grow more than the rate of the economy. I’m using the risk-free rate as a proxy to it, so the terminal growth becomes it;
• Initial and Terminal Cost of Capital – I’m using for both the estimated cost of capital;
• Initial and Terminal Tax Rate – I’m using for both a value near its recent average ~30%;
• Terminal ROIC – I’m using a value of 10%, a little above its terminal cost of capital but below its historical averages.

All the other inputs were taken from the financial statement or from analyst projections.

The DCF gives us an estimated fair value of 538.43 euros for LVMH.

Something that we can also do now is to play around with Monte Carlo simulations. What this will allow us to do is to simulate multiple DCF valuations with pre-defined ranges for each of the inputs. Each simulation will randomize the inputs between these pre-defined values. For this I also used analysts estimates.

As you can see from the above LVMH seems to be fairly valued or even a little overvalued given that its current price of 589.30 euros is around or a little below P80. From these simulations we can extrapolate that there’s between ~50-80% probability of LVMH being overvalued.

Please be free, as before, to fill in your own values. Make the valuation your own and do yourself a DCF valuation using your own assumptions: DCF – The Fair Value Journal

EPS Growth (Weight: 18%)

For this valuation method, I’ve used the current EPS and the analysts estimates of EPS growth. I also assumed a 24 PE for the company.

Then again used the Monte Carlo simulations to check what happens when the input values change within a specified range:

Using this valuation method, LVMH that is currently priced at 589.30 euros seems to be undervalued being currently valued well below P10. From this we can extrapolate that there’s more than 90% probability that the stock is undervalued.

As before, feel free to try this yourself: EPS Growth – The Fair Value Journal

Historical P/E (Weight: 12%)

The current P/E (Price / Earnings) ratio is below its 7-8 Year average. This means that the company is undervalued by this metric. Assuming a mean reversion to its historical average of 29.79 we can assume a fair value of 650.11 euros.

For every type of historical and relative valuation you can use the same free tool: Historical / Relative Valuation – The Fair Value Journal

Historical EV/EBITDA (Weight: 10%)

The current EV/EBITDA (Enterprise Value / Earnings Before Interests, Taxes, Depreciation and Amortization) ratio is below its 7-8 Year average. This means that the company is undervalued by this metric. Assuming a mean reversion to its historical average of 15.07 we can assume a fair value of 667.65 euros.

DDM – Variable Growth (Weight: 8%)

Now we look at a Dividend Discount Model (DDM). This will allow us to value the company, using its dividend payments and the overall growth of it. In this type of DDM we’ll set the dividend to grow at an initial rate that then over time moderates and declines to a given terminal stable growth that will be maintained “forever”.

For the stable growth, I normally use the growth rate of the economy the company is based on, namely the 10-Year bonds of the currency used by that economy country. The same as before, here we’re using the 10 Year bonds of Germany.

As you can see below I started the dividend growth at 12.78% (analysts expectations) and then slowly the growth moderates to 2.81% (the risk free rate – 10-Yr bonds of Germany). Also note the use of the Cost of Equity, calculated previously when we also calculated the Cost of Capital.

Why use Cost of Equity and not Cost of Capital as the discount rate for DDM? Its because dividends are paid to equity holders after debt obligations. Since DDM values equity-only cash flows, we use an equity-only discount rate (the Cost of Equity).

Then, as always, we can also use a Monte Carlo simulation to dive deeper into the valuation 🤓

Historical Dividend Yield (Weight: 8%)

The current Dividend Yield ratio is above its 7-8 Year average. This means that the company is undervalued by this metric. Assuming a mean reversion to its historical average of 1.66% we can assume a fair value of 785.23 euros.

Historical P/CF (Weight: 6%)

The current P/CF (Price / Free Cash Flow) ratio is below its 7-8 Year average. This means that the company is undervalued by this metric. Assuming a mean reversion to its historical average of 18.90 we can assume a fair value of 710.24 euros.

Historical P/B (Weight: 4%)

The current P/B (Price / Book) ratio is below its 7-8 Year average. This means that the company is undervalued by this metric. Assuming a mean reversion to its historical average of 5.89 we can assume a fair value of 731.59 euros.

Historical P/S (Weight: 4%)

The current P/S (Price / Sales) ratio is below its 7-8 Year average. This means that the company is undervalued by this metric. Assuming a mean reversion to its historical average of 4.35 we can assume a fair value of 699.19 euros.

✍️Summary

Now that we did all the heavy work, let’s take the above and come up with the company weighted average fair value.

I basically take each valuation method used and given my confidence on the company apply a 20% or 10% discount (when to buy) and addition (when to sell) or use the Monte Carlo P10, P20, P80 and P90 values:

Feel free to choose your own values, but for me I will pick a fair value of 586.40 euros because I expect LVMH to maintain its status and overall good business metrics.

Overall it seems LVMH is fairly valued or at maximum a little overvalued at the current prices.

Fair Value: 586.40 euros