– Chris Demasi & Andrew Macken
Montaka’s investing framework consists of identifying large, reliable structural transformations with favourable economics, and owning businesses that are likely long-term winners in that space when they’re undervalued. We apply this framework to LVMH, a high-end luxury powerhouse.
LVMH, formed in 1987, is a holding company with 75 branded houses including Louis Vuitton, Christian Dior, and Tiffany. The Arnault family owns 49% of shares and controls 64% of voting rights. The company’s largest segment is leather goods, accounting for about half of its total revenue. The leather goods segment drives an outsized share of LVMH’s overall economics, with the highest margins and fastest growth. Louis Vuitton and Christian Dior account for about 75% of the leather goods business.
Investment Thesis:
We outline the five pillars of our LVMH investment thesis:
1. LVMH has a portfolio of monopoly-like assets LVMH owns 75 branded houses or “maisons,” some of which date back centuries. These brands have long histories and heritage, combined with decades of careful brand investment by LVMH. This makes them monopoly-like assets that competitors cannot recreate, regardless of time or money spent. These brands represent significant barriers to entry for competitors.
2. High net worth customer base LVMH’s customer base is disproportionately exposed to high-end customers who are relatively immune to economic cycles. Andy describes it as a power law distribution, where most of the group’s revenues, especially in leather goods, come from a small group of ultra-high net worth individuals. This contrasts with brands more exposed to “aspirational” customers who are more affected by economic pressures.
3. High-end luxury markets grow structurally The global luxury market is expected to grow from €1.5 trillion to between €2-2.5 trillion by 2030. Additionally, the number of ultra-high net worth individuals (with assets of at least $30 million) is growing by about 4% annually. Their wealth is also increasing due to compounding, which suggests potential for even faster growth in the high-end luxury market than current forecasts predict.
4. Revenue growth is driven by price and mix LVMH’s revenue growth, particularly in the crucial leather goods segment, is primarily driven by price increases and product mix rather than volume or new store openings. For example, in Louis Vuitton, about 80% of revenue growth from 2020 to 2023 came from price and mix. This type of growth is highly profitable, leading to higher incremental profit margins.
5. Valuation and market expectations Both analyst consensus, and market-implied expectations are too conservative regarding LVMH’s future growth and profitability. LVMH’s profit margins could trend upwards over time, potentially approaching the levels seen in pure-play luxury companies like Hermès. Additionally, we believe the market is applying too low a valuation multiple to LVMH, especially considering the dominance and profitability of its leather goods segment.
LVMH is an attractive long-term investment opportunity, thanks to its strong position in the growing high-end luxury market, its customer base’s resilience to economic cycles, and what we perceive as current undervaluation by the market.
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Note: Montaka is invested in LVMH.
Disclaimer: This video and article is prepared by Montaka Global Pty Ltd (ABN 62 604 878 533, AFSL No. 516942) and does not consider your personal financial situation or needs. Seek professional advice before acting on this information. Past performance isn’t indicative of future results. Investment values can fluctuate. Information is from sources deemed reliable but not guaranteed. Opinions expressed may change without notice. Montaka Global Pty Ltd isn’t obligated to update this information. Neither Montaka Global Pty Ltd, its related entities, nor their representatives accept liability for any loss arising from this video’s use. Montaka Global Pty Ltd and associates may have interests in mentioned securities or advise issuers. This video isn’t an offer or solicitation to deal in any securities/instruments mentioned. Viewers should exercise their own judgment and seek specific financial and investment advice.
