Neutral on LVMH; placed in C/D tier due to substantial decline in operating profits (from $22.5B to <$17B) and lack of obvious catalysts, despite attractive valuation.

I actually thought about also looking at LVMH and MS again sort of as like the luxury playbook and how they are doing.

So uh LVMH was first uh was first put on my radar um back in 2024. a member of our uh mastermind community talked to me about it and um you know the luxury industry it just sounded uh the thesis sounded too good to be true.

You know it was uh oh there's a lot of really rich people and they don't care about the price for what they pay. Uh they're you know very very price insensitive uh and you know they're addicted to these luxury goods.

Um and and so that was very much like you could see uh the operating profit peaked in 2023 for LVMH. That was very much uh the narrative uh at the time. Um and then we've seen that decline substantially.

Uh so 22 billion in operating profit, 22.5 billion um in operating profit uh in December 23 for that fiscal year and then in the last 12 months a bit under 17 billion. Um so that's a that's a dramatic um decline.

And so you know what what is causing that? Uh you know if you read the headlines the finger is is being pointed at uh at ch the Chinese market. um you know there's been some deflation in that economy um an ongoing sort of housing bubble that is uh you know weighing on the financial system uh and so point being um the appetite for spending on luxury goods I believe China is the uh largest luxury market in the world yeah uh so there's been uh there apparently there's been some hits there in China but um you know I think I went from being really excited about the luxury industry thinking um you know these businesses will will uh have endured you know some of the brands like date back to have connections to Napoleon you know it's incredible pedigree and and uh so you're thinking you know hey these brands are going to always be there they're always going to be uh admired um and I think LVH is is not a bad that u but I I've definitely come to appreciate uh you know the luxury industry is is very volatile uh and I think you can probably I don't I guess it doesn't map on to um uh their operating profits here but I would guess like um you know if the stock market goes up uh financial assets are appreciating u you get a lot of people that suddenly feel more wealthy and are more inclined to uh to spend on on luxury So, it's it's actually sort of interesting that the the market has done pretty well the last few years and LVMH um you know, I guess maybe the the Chinese equity market hasn't done as well and maybe that if if it had that would have driven more demand, but but um anyways, I just uh you know, I remember hearing I came into looking at LVMH with so much hype about how this was basically like the perfect business model.

Um and and I kind of came away um neutral on it of like you know if we can get a really good price on the business uh you know about 20 times earnings is is I think probably more fairly valued than um really obviously attractive for LVMH and um you know they just I I think uh like Hennessy right like the alcohol consumption is um is is down considerably uh among Gen Z. uh I think there's also some question of whether uh you know I think a lot of the a lot of the the wealth is being created in Silicon Valley and among uh you know these AI uh founders and so those would be the people you know like th those founders and their employees right these people kind of creating the next round of of major wealth in the economy um they would be the best prospective candidates for uh LVMH to target uh and it doesn't seem like those people are gravitating to to LVMH's products as we've seen all this wealth creation uh from from the AI bubble or whatever you want to call it and LVH LVH's businesses is still declining.

So that's kind of my take on it. I'm I'm pretty I'm pretty neutral. I would put LVMH like firmly um in like C or D territory where some incredibly high quality assets. I think um definitely I mean just look at the PE uh it's it's the lowest it's been in a decade.

Uh so you're you're not getting a bad price. Um but you know I mean also look at the operating profits. Uh 20 20 PE for a business in decline. Um and I don't think it'll be per you know indefinitely permanently in decline but uh you don't know if that decline is going to be another two three years. um they just I don't see an obvious catalyst for them and I like I said I think it's concerning that um the financial markets are doing very well and there's a lot of wealth creation occurring and supposedly you know LVMH is closely tied to to global wealth uh or like you know the luxury industry generally um and LVMH isn't benefiting that's like the biggest uh that seems to be the biggest question mark for me

Um what I didn't fully understand I got to say that is for the longest time especially in like 2020 2021 when the companies were doing very well. It was always like the narrative that luxury companies are not as cyclical as fashion as otherwise because you know the wealthy people always spend there's no recession or anything and I think this is something that we have not seen yet like in the last couple of years um where the market didn't work out as well anymore for example um those companies actually did um struggle and you know they the growth was slowing down and I think to me and that's why I always liked MS a bit more and we discussed this in in the episodes is that MS is more concentrated um and it's also more desirable MS is actually going for like the top.1% of wealth globally and LVMH is a bit more um desirable where it's a bit more about you know if if you just land your new dream job for example um maybe you will buy an LVMH back which is just not that easy to do with MS. So I feel like um LVMH is more tied to the economy and you do see that in the numbers.

Um, I also think that if you just accept the fact that they are cyclical companies and we are value investors, probably now is the best time to buy them. Um, they look the ugliest, nobody wants to own them.

Um, but I mean, I think it's the first time either ever or in decades that LVMH is two consecutive years of negative growth. Um, MS is slowing down. So, I don't know. I feel like again, I probably want to look at them again for for an episode.

Um, and that's not because I feel like they should only be a Dtier, for example. Um, I do think they might just be um more attractively valued right now than in the long term.

And I should say that I mean MS you see it here like the multiple list is at 35. Um, so it's still pretty um pretty hefty. But I should also say if you compare for example the operating profits um you see MS operating profits, right?

It's a bit stagnant right now. Um but generally they're still growing. If you compare that to LVMH, they were declining quite quickly. Um so you do see um the primary reason there for example is the margins.

Um so margins for LVMH are at about 20% operating and cash flow. If you look at that for MS for example it is significantly higher. You still have 40% margins 30% cash flow margins and they are stable.

Um which is why they still earn significantly more money.

Um, so I don't know. I think for me personally right now and um I would put I think you said LVMH. Is it C2D? What you would have >> I think LVMH. Yeah. CD and >> it's tough. It's tough though because like Hermes is the is a better quality business.

>> But then it could cut both ways. Well, but but then the valuation you're paying, you know, 20 times earnings versus first versus 35 times earnings almost kind of nullifies the difference between them.

I I I don't know. I would probably put them both like firmly in C or or maybe if you want Hermes a little higher, I think that's fine, too.

>> I always like the mass a bit more. I mean, this actually a good comment. I've owned LVMH and MS in the past, but I've never been 100% comfortable the artificial scarcity that the luxury industry relies on.

I think this is a point where I kind of I kind of get it, but then you look at the history of MS and for how long that worked um that I kind of feel like there are brands where consumers just accept that and I think MS is one of them.

Yeah. Yeah. Let's see here. Bought several MS bags, but they still play hard to get, so they have a massive reserve of growth. Well, well, that's that's how you see how difficult it is to get one of those backs, right?

That's why I believe MS is probably here and LVMH is slightly lower. Um, LVMH is a diversified ETF like, but Vuitton is way below MS. That's how I see it. I think there are people, I think Sean, you also said that in our episode, that prefer the diversification more, and I also get that.

All right. So, it's the highest rated stock right now out of MS, LVMH, and Nike. Um which is which is quite telling.

Whereas, um I don't know what's going to happen with luxury. Like I I think your intuition that like LV LVH is probably cheap now is is right. Um but I just I don't have any I don't have enough understanding of whether it's it's a value trap and what the trends are with with luxury.