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VALUATION OF THE COMPANY MAY, 2016

In collaboration with: Produced by: Darino Serena 064597 Palumbo Paola 062111 Rella Rosalba 063717 Serio Francesca 063929

Lecturer: Costanza Consolandi


Research Team

Graduated in Economics University of Siena. Serena Darino, MSc Finance

and

Business,

Occupational field: Financial examiner

Graduated in Economics University of Bari. Rosalba Rella, MSc Finance

Banking,

Occupational field: Business analyst

Graduated in Economics University of Bari. Paola Palumbo, MSc Finance

and

and

Business,

Occupational field: Financial planner

Graduated in Economics University of Bari.

and

Business,

Occupational field: Luxury goods analyst Francesca Serio, MSc Finance

2


Table of contents Abstract ............................................................................................................................................................. 4 1.

Valuation Approach ................................................................................................................................... 4

2.

Pro Forma Financial Statements................................................................................................................ 5

2.1.

Pro Forma Income Statement ............................................................................................................... 5

2.2.

Pro Forma Balance Sheet ...................................................................................................................... 7

3.

“What if� analysis ...................................................................................................................................... 9

3.1.

Bull Scenario .......................................................................................................................................... 9

3.2.

Bear Scenario ....................................................................................................................................... 10

4.

Dividend Discount Valuation ................................................................................................................... 11

5.

Cost of Capital.......................................................................................................................................... 11

5.1.

Capital Asset Pricing Model ................................................................................................................. 11

5.2.

The Beta ............................................................................................................................................... 11

5.3.

The Risk Premium ................................................................................................................................ 12

5.4.

The Cost of Equity ................................................................................................................................ 13

5.5.

The Cost of Debt .................................................................................................................................. 13

5.6.

The Weighted Cost of Capital .............................................................................................................. 13

6.

Discounted Cash Flow Valuation ............................................................................................................. 13

7.

Relative Valuation.................................................................................................................................... 17

8.

Recommendations................................................................................................................................... 20

References ....................................................................................................................................................... 21

3


Abstract The aim of this report is to conclude a business valuation of LVMH, which is started in the previous report with the historical study of data and it is now proceeding with the forecast of its expected growth. This company has attracted our attention since it is one of the most important and valuable firm in the fashion world. It is an area that we decided to analyze carefully, to understand its trends and movements in the economic world. We have thus been able to construct our assessment on the luxury environment and the reaction of the luxury sector to the cyclical and continuous market changes. In particular, we have been able to deepen our knowledge about the strength of an ever increasing company such as LVMH. The methods we used in this report, such as the Four Stages Growth model, the Discounted Cash Flow method, the Gordon model and the Relative Valuation, allowed our understanding of the company value under an analytical point of view, with a deep sight on data as the expression of the company objectives and strategies, to investigate “what makes the business tick”. The consistency of the assumptions we made about our company has been confirmed and came out from each different valuation approach, demonstrating the huge presence of the company in the sector and its stability over time. We can conclude this part and let the reader go on in the analysis with this quote, that perfectly fits our thoughts as analysts: "Never invest in a business you can’t understand" - Warren Buffett.

1. Valuation Approach We will take the reader into the core of our analysis, showing our valuation approach and the underlying rationale of methodological choices.

backed up by reality, which implies that the paid for any asset should reflect the cash flows it is expected to generate.” [Damodaran on valuation, 2006]

We start with the inquiry of pro-forma financial statements that allows a forecast of future trends of both Income Statement and Balance Sheet. This guides us towards a closer view into the potential evolution path of LVMH.

Due to the nature of the company considered in this report, the Discount Cash Flow methodology will allow to determine the value of LVMH. Following this line of thought, the Free Cash Flows to the Firm will be used, since it provides a technique for an estimation of value from an operational point of view.

After such an analysis, we dig deeper through the Dividend Discount Model and the Discount Cash Flow methodology, since we strongly believe that: “There are those who are disingenuous enough to argue that value is in the eye of the beholder, and that any price can be justified if there are other investors willing to pay that price. Perceptions need to be

Further, we adopt a market perspective, proceeding our insight in LVMH with a Relative Valuation, that let us see how the market values our asset in comparison with similar assets.

4


2. Pro Forma Financial Statements 2.1.

Pro Forma Income Statement

To project the financial impact of management’s plans, we start our analysis forecasting LVMH’s financial statements. In the last five years, the company showed a constant growth, thanks to its investments in operating activities, taking special care to its marketing campaigns and its acquisitions, in order to affirm its brands’ development and to enlarge its international expansion. For these reasons, the main drivers of our projections are the forecasted level of sales and the expected costs associated with achieving those sales. The company’s valuation is centered on its future strategic objectives, without neglecting the way it behaved in the past. Hence, to forecast these amounts, we base our estimations on different information: the historical trend, macroeconomic factors that may impact the future growth and, last but not least, firm’s specific features revealed by the analysis of profitability.  Revenues: in the 1st sub period (2016-2018), believing that the past could remain a reference for the future and observing the outperformance of the company over the sector, we assume that LVMH will grow at its historical geometric growth rate (8.55%), greater than the average growth rate of the luxury market, defining a period of high growth and strong boost. Taking into account the company’s geographical diversification of revenues and its resolute strategy of expansion all over the world, we set the revenues’ growth rate for the 2nd sub period (2019-2021) at the same level of the CAGR of the global luxury goods market1, weighted by region of delivery.

Since it becomes harder for firms to sustain high growth rates as they become larger, we stabilize the growth rate for the last sub period (from 2025 on) at a sustainable level. The luxury 1 2

Data source: Statista Data source: OECD

market has shown historical cyclicality and high correlation with the GDP growth rate, often emphasizing up- and down-swings. For this reason, we refer to the geometrical growth rate of the GDP long term forecast (1990-2060)2, weighted for the percentage of sales of the company in each geographic area.

As a consequence, during the 3rd sub period (2022-2024), we let the growth rate decrease gradually to the long term growth rate of 2.07%, perpetually sustainable.  Cost of sales: following the historical trend, we assume that the Cost of sales will slightly decrease (-0.89% each year as a percentage of revenues) thanks to economy of scales, in particular factors related to the degree of market control, organizational and in-firm aspects.  Marketing and selling expense: to strengthen its brands all over the world, LVMH has always taken special care to its marketing campaigns. Furthermore, the growing attention by the luxury sector to products of higher and higher quality, leads us to assume a slightly increase in M&S expense, with a variation of +0.7% each year as a percentage of revenues.  The Group has always been characterized by a relevant amount of Taxes. We do not expect a significant change in the tax rate, which is almost steady around 33%.  All the Other items of the income statement are computed as a constant percentage of Gross Margin, EBIT or EBT (according to the margin they are related to), pursuing the company’s target to maintain a stable trend, as observed in the past.

5


Pro Forma Income Statement (million euros)

Current values

Expected values

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025+

23659

27970

29016

30638

35664

38713

42023

45616

47468

49395

51401

53226

54854

56264

57429

18,22%

3,74%

5,59%

16,40%

8,55%

8,55%

8,55%

4,06%

4,06%

4,06%

3,55%

3,06%

2,57%

2,07%

Operating income Operating revenues variation %

Cost of sales % of sales

Gross margin

-8092

-9863

-9997

-10801

-12553

-13499

-14280

-15094

-15285

-15466

-15636

-15718

-15710

-15613

-15425

34,20%

35,26%

34,45%

35,25%

35,20%

34,87%

33,98%

33,09%

32,20%

31,31%

30,42%

29,53%

28,64%

27,75%

26,86%

18107

19019

19837

23111

25214

27744

30522

32183

33930

35765

37508

39144

40651

42003

16,32%

5,04%

4,30%

16,50%

9,10%

10,03%

10,01%

5,44%

5,43%

5,41%

4,87%

4,36%

3,85%

3,33%

15567 variation %

Operating expenses General and administrative expenses

-1944

-2151

-2212

-2373

-2663

-3000

-3302

-3632

-3830

-4038

-4256

-4463

-4658

-4837

-4998

% of gross margin

12,49%

11,88%

11,63%

11,96%

11,52%

11,90%

11,90%

11,90%

11,90%

11,90%

11,90%

11,90%

11,90%

11,90%

11,90%

-8360

-10013

-10767

-11744

-13830

-14928

-16498

-18228

-19301

-20430

-21619

-22759

-23840

-24846

-25763

% of sales

35,34%

35,80%

37,11%

38,33%

38,78%

38,56%

39,26%

39,96%

40,66%

41,36%

42,06%

42,76%

43,46%

44,16%

44,86%

Marketing and selling expenses

Core operating profit margin

5263

5943

6040

5720

6618

7286

7944

8661

9053

9462

9890

10285

10646

10967

11242

12,92%

1,63%

-5,30%

15,70%

10,09%

9,04%

9,03%

4,52%

4,52%

4,52%

4,00%

3,51%

3,01%

2,51%

6

-19

-23

-5

-13

18

19

21

23

24

25

26

27

28

29

0,04%

0,10%

0,12%

0,03%

0,06%

0,07%

0,07%

0,07%

0,07%

0,07%

0,07%

0,07%

0,07%

0,07%

0,07%

variation %

Income/loss from joint ventures and associates % of gross margin

Other operating income and expenses

-109

-182

-119

-284

-221

-237

-261

-287

-303

-319

-336

-353

-368

-382

-395

0,70%

1,01%

0,63%

1,43%

0,96%

0,94%

0,94%

0,94%

0,94%

0,94%

0,94%

0,94%

0,94%

0,94%

0,94%

5160

5742

5898

5431

6384

7066

7703

8396

8773

9167

9578

9959

10306

10613

10877

11,28%

2,72%

-7,92%

17,55%

10,69%

9,00%

9,00%

4,49%

4,49%

4,49%

3,97%

3,48%

2,99%

2,48%

-151

-138

-101

-115

-78

-147

-160

-175

-182

-191

-199

-207

-214

-221

-226

% of EBIT

2,93%

2,40%

1,71%

2,12%

1,22%

2,08%

2,08%

2,08%

2,08%

2,08%

2,08%

2,08%

2,08%

2,08%

2,08%

-91

126

-97

3062

-336

-191

-209

-228

-238

-248

-260

-270

-279

-288

-295

% of EBIT

1,76%

2,19%

1,64%

56,38%

5,26%

2,71%

2,71%

2,71%

2,71%

2,71%

2,71%

2,71%

2,71%

2,71%

2,71%

% of gross margin

Net operating income before tax (EBIT) variation %

Financing income/expenses Cost of net financial debt Other financial income and expenses

Income before taxes and minority interests

4918

variation %

Taxes % of EBT

Minority interests % of EBT

Comprehensive income variation %

5730

5700

8378

5970

6728

7334

7994

8353

8728

9120

9482

9812

10105

10356

16,51%

-0,52%

46,98%

-28,74%

12,69%

9,00%

9,00%

4,49%

4,49%

4,49%

3,97%

3,48%

2,99%

2,48%

-1453

-1821

-1753

-2273

-1969

-2048

-2232

-2433

-2543

-2657

-2776

-2886

-2987

-3076

-3152

29,54%

31,78%

30,75%

27,13%

32,98%

30,44%

30,44%

30,44%

30,44%

30,44%

30,44%

30,44%

30,44%

30,44%

30,44%

-400

-484

-511

-457

-428

-513

-560

-610

-637

-666

-696

-723

-749

-771

-790

8,13%

8,45%

8,96%

5,45%

7,17%

7,63%

7,63%

7,63%

7,63%

7,63%

7,63%

7,63%

7,63%

7,63%

7,63%

3065

3425

3436

5648

3573

4167

4542

4951

5173

5405

5648

5872

6077

6258

6413

11,75%

0,32%

64,38%

-36,74%

16,61%

9,00%

9,00%

4,49%

4,49%

4,49%

3,97%

3,48%

2,99%

2,48%

6


2.2.

Pro Forma Balance Sheet

In order to estimate the future projections for the balance sheet, we need to distinguish two kind of items and treat them separately: those dependent on the income statement are computed as a percentage of Sales, Cost of sales or Tax expense, according to their nature; on the other hand, those not dependent on the income statement are expected to be almost steady as an average percentage of Total assets, Total debt or Capital employed, as showed by the historical trend. In the first category we have:  Property, plant and equipment: it is an asset that is essential for business operations. Its expansion is indispensable to sustain higher revenues and its importance in the business management is linked to its not easy liquidation. We assume it will be constant at 32.66% of revenues each year (historical average).  Deferred tax and Income taxes: they are computed as the historical average proportion of Tax expense, taking into consideration that we do not expect any significant change in tax rates.  Inventories: it is assumed as a stable percentage of sales (29.76%), being one of the primary source of revenues’ generation for the company.  Trade accounts receivables: the trade accounts receivable/revenues ratio is quite steady over the previous years and it is expected to be constant in the forecasted 10 years too.  Cash and cash equivalents: taking into account that sales affect the required financing levels, we consider Cash related to revenues in a constant percentage of 10.42%.

All the Other items, which are not dependent on the income statement, are assumed to be conditioned by the mean of the past values, as a proportion of Total assets, Total debt or Capital employed. The growth rates of these Totals are based on the historical geometric growth rate, pursuing LVMH’s goal to maintain a stable structure and believing that no significant changes would affect the company’s organization. An exception is represented by Total assets, which grow up more than the historical average, to meet the higher requirements needed in order to sustain greater revenues. Specifically, we link the dynamic of Operating assets to the Group’s revenues, computing them with the following formula: đ?‘‚đ?‘?đ?‘’đ?‘&#x;đ?‘Žđ?‘Ąđ?‘–đ?‘›đ?‘” đ??´đ?‘ đ?‘ đ?‘’đ?‘Ąđ?‘ đ?‘Ą = đ?‘‚đ?‘?đ?‘’đ?‘&#x;đ?‘Žđ?‘Ąđ?‘–đ?‘›đ?‘” đ??´đ?‘ đ?‘ đ?‘’đ?‘Ąđ?‘ đ?‘Ąâˆ’1 +

(đ?‘ đ?‘’đ?‘Ą đ??źđ?‘›đ?‘?đ?‘œđ?‘šđ?‘’đ?‘Ą ∗ đ?‘…đ?‘’đ?‘Ąđ?‘’đ?‘›đ?‘Ąđ?‘–đ?‘œđ?‘› đ?‘…đ?‘Žđ?‘Ąđ?‘’),

with an average retention rate of 58.56%.

Four items are adapted to offset the balance sheet: Goodwill, Non-current available for sales financial assets, Other liabilities and Reserves. Anyway, they still show the same historical tendency, with a slightly increase over the years. Despite it can be thought that 10 years is too long to forecast any unpredicted trend, it allows to reach a stable growth period, in order to observe the way the company behaves inside the luxury sector. Over the 10 years of forecasting, it shows a geometric growth rate in Net income equal to 4.41%, an increase in Assets and Liabilities equal to 5.71% and 5.45% respectively and a constant positive cash and liquidity position (Net working capital always positive). LVMH demonstrates a solid financial structure, being able to remain flexible and dynamic in the everchanging world.

 Non current provisions: these liabilities are present obligations of the amount arising from past events. For this reason, we link them to the evolution of the company’s sales in a fixed proportion of 6.39%.  Trade accounts payable: in order to make payments owed by the company to suppliers and other creditors be sold, Trade accounts payable is computed as the 33.2% of Cost of sales each year (historical percentage).

7


Pro Forma Balance Sheet (million euros) 2011

Current values 2012 2013 2014

2015

2016

2017

2018

2019

Expected values 2020 2021

2022

2023

2024

2025+

19596 10617 16788 734 1769 15297 373 1451

20842 11446 17384 780 1839 15840 388 1543

22168 12437 17915 830 1903 16325 401 1641

23578 13586 18376 883 1960 16744 413 1746

25077 14889 18756 939 2009 17091 423 1857

63316

66623

70062

73621

77285

81041

3081 700 3508 4946 1327

4132 745 3650 5147 1411

5316 792 3799 5356 1501

6710 843 3933 5546 1596

8347 896 4054 5716 1698

10266 953 4158 5863 1806

12508 1014 4244 5984 1921

12183 69305

13562 73713

15085 78401

16764 83387

18629 88691

20711 94331

23046 100331

25671 106712

4942 4245 9187

5242 4503 9745

5561 4776 10336

5898 5066 10964

6256 5373 11629

6636 5699 12335

7039 6045 13084

7466 6412 13878

7919 6802 14721

2474 4746 6538 4482 540 379 1802

2685 5173 6934 4741 588 402 1708

2915 5639 7355 5011 641 427 1594

3033 5892 7802 5075 670 452 2089

3156 6157 8275 5135 700 480 2629

3285 6433 8778 5191 732 509 3215

3401 6689 9311 5218 761 540 3931

3505 6922 9876 5216 787 573 4784

3595 7129 10475 5184 811 608 5784

3670 7306 11111 5121 831 644 6941

23522

20961

22233

23583

25014

26532

28143

29851

31663

33585

35624

31802

29622

31420

33327

35350

37496

39772

42186

44747

47463

50344

152 2655 -374 492 13190 5648

152 2579 -240 1137 17138 3573

178 3933 -466 551 23279 4167

189 4183 -495 586 24735 4542

201 4449 -527 624 26280 4951

214 4732 -560 663 28140 5173

227 5033 -596 706 30129 5405

242 5353 -634 750 32255 5648

257 5694 -674 798 34557 5872

274 6056 -717 849 37046 6077

291 6441 -763 903 39737 6258

309 6851 -811 960 42644 6413

26879 1028

21763 1240

24339 1460

31642 1360

33741 1447

35978 1539

38362 1636

40905 1741

43615 1851

46504 1969

49584 2094

52868 2227

56368 2369

56176

53362

57601

61264

65161

69305

73713

78401

83387

88691

94331

100331

106712

Operating assets Brand and other intangible assets Goodwill Property, plant and equipment Investments in joint ventures and associates Deferred tax Inventories and work in progress Income taxes Other current operating assets

11482 6957 8017 170 760 7510 121 880

11322 7709 8694 483 952 7994 201 864

12596 9058 9621 480 913 8492 223 811

13031 8810 10387 519 1436 9475 354 924

13572 10122 11157 729 1945 10096 384 1118

14397 9816 12644 539 1305 11521 275 1066

15313 9249 13725 573 1422 12506 300 1134

16287 8668 14898 610 1551 13575 327 1206

17323 9306 15503 649 1620 14127 341 1283

18424 9955 16133 690 1693 14700 357 1364

Total operating assets

35897

38219

42194

44936

49123

51563

54223

57122

60151

5982 478 1878 2303 575

6004 519 1972 2187 949

7080 457 2174 3226 1045

580 489 2274 4091 992

574 552 2521 3594 1237

1122 582 2861 4034 1103

1662 619 3106 4379 1173

2153 658 3371 4753 1247

11216 47113

11631 49850

13982 56176

8426 53362

8478 57601

9701 61264

10938 65161

Interest bearing debt Long term borrowings Short term borrowings Total interest bearing debt

4132 3134 7266

3825 2950 6775

4149 4674 8823

5054 4189 9243

4511 3769 8280

4660 4002 8662

Non interest bearing debt Non current provisions Deferred tax Other non current liabilities Trade accounts payable Income taxes Current provisions Other current liabilities

1530 3925 4506 2952 443 349 2716

1772 3884 5456 3118 442 335 2560

1797 4280 6404 3297 357 324 2987

2291 4392 6447 3606 549 332 3499

1950 4685 7957 3960 640 421 3909

Total non interest bearing debt

16421

17567

19446

21116

Total debt

23687

24342

28269

30359

Risk bearing capital Share capital Share premium account Treasury shares and LVMH-share settled derivatives Cumulative translation adjustment Reserves Net profit

152 3801 -485 431 15407 3065

152 3848 -414 342 17071 3425

152 3849 -451 -8 19901 3436

Total risk bearing capital Minority interest

22371 1055

24424 1084

Capital employed

47113

49850

Financing assets Non current avalaible for sale financial assets Other non current assets Trade accounts receivable Cash and cash equivalent Other current assets Total financing assets Total assets


3. “What if” analysis LVMH is a well-established company in the luxury goods market: it takes up in every sector with a wide diversification of products’ lines. It has a good geographical balance of revenues and each business group, inside the company, is characterized by a strong brand position. However, its mature growth

3.1.

stage, its risks’ exposure and its aggressive competitiveness, can represent a threat to future developments of its business. Therefore, all the assumptions stated above may not concretize in the future and, consequently, it is important to analyze the possible deviations from the base case.

Bull Scenario  Sales prospects towards retail, digital and ecommerce platforms, which are expected to grow at 20%-25% in the luxury market3.

LVMH has always been successful in overcoming hurdles and big challenges like deflation, geopolitical instability, fluctuating currencies, consumers’ changing preferences. What could happen if the company succeeds to catch many key potentials? Positive forces could be:  New stores openings and new developments which include expansion in new growing countries, especially in Asia and emerging markets.  Launch of new products’ lines, both in men and women’s segments, to expand in any market sectors.

 Clear strategy, solid position and a reputation of excellence that allow the brand to seize every opportunity. Its strong ability to offset negative effects on the topline leads us to analyze a “bull” scenario, with an increasing adjustment of 2% in comparison with the base scenario’s assumptions.

Bull scenario - Income Statement

70000 50000 30000 10000 -10000

2011

-30000

Operating revenues General and administrative expenses Income/loss from joint ventures and associates Cost of net financial debt Taxes Gross margin Net operating income before tax (EBIT) Comprehensive income

2012

2013

2014

120000

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

Cost of sales Marketing and selling expenses Other operating income and expenses Other financial income and expenses Minority interests Core operating profit margin Income before taxes and minority interests

Bull scenario - Balance Sheet

90000 60000 30000 0 2011 2012 2013 2014 Total operating assets Total interest bearing debt Total risk bearing capital

3

2015

2016 2017 2018 2019 2020 Total financing assets Total non interest bearing debt Capital employed

Deborah Aitken, Senior luxury goods analyst, Bloomberg Intelligence.

2021

2022 2023 Total assets Total debt Net profit

2024

2025

9


3.2.

Bear Scenario

More important is to analyze the pessimistic scenario, considering macroeconomic factors pertinent to the luxury goods sector which could affect negatively LVMH’s strength.  The lasting effects of the global financial crisis which impacted more on Wine & Spirits and Watches & Jewelry’s performances, two key sectors that contribute for the 22% to the company’s revenues, caused a destocking at distributors and retail traders.  Perfumes & Cosmetics offers the lower amount of future growth, compared with the others business groups, contributing for the 13% to LVMH’s total revenues.  Europe is the largest market in the company’s sales (30% of total revenues) and its economic and financial instability could slow down the Group’s performance.  Emerging markets could not develop enough to drive the company’s revenues and to generate

profitability from those investments, taking into account the uncertainty that characterizes, in particular, Chinese economy.  LVMH’s management is committed to brand exclusivity and if the company will not be able to gain new market’s sectors, this could make resilient the future growth of the Group.  Last but not least, LVMH shows a hard exposure to foreign exchange risk: it is about the impact on sales, on profitability and the lack of spending. The depreciation of foreign currencies could affect significantly the Group’s revenues, as it happened in 2013 with the Japanese Yen and in 2015 with the Chinese Yuan. Hence, what could happen if everything goes wrong? To project the financial effect of these weak points, we consider the “bear” scenario, through an adjustment of -2% with respect to the assumptions made in the base case.

Bear scenario - Income Statement 40000 20000 0 2011 -20000

2012

2013

2014

2015

2016

2017

Operating revenues General and administrative expenses Income/loss from joint ventures and associates Cost of net financial debt Taxes Gross margin Net operating income before tax (EBIT) Comprehensive income

100000

2018

2019

2020

2021

2022

2023

2024

2025

Cost of sales Marketing and selling expenses Other operating income and expenses Other financial income and expenses Minority interests Core operating profit margin Income before taxes and minority interests

Bear scenario - Balance Sheet

80000 60000 40000 20000 0 2011 2012 2013 2014 Total operating assets Total interest bearing debt Total risk bearing capital

2015

2016 2017 2018 2019 2020 Total financing assets Total non interest bearing debt Capital employed

2021

2022 2023 Total assets Total debt Net profit

2024

2025

10


4. Dividend Discount Valuation This valuation model considers the value of the stock as the present value of expected dividends on it. In our analysis, we have used the Gordon Growth Model, the first version among the dividend discount models, because it perfectly fits LVMH, as a firm in "steady state" with dividends growing at a rate that can be sustained almost ever. What does "steady state" mean for the Group? Basically, it means that the company has well established dividend payout policies that they will pursue into the future. At the Annual Shareholders’ Meeting on April 14, 2016, LVMH has proposed a dividend of ₏3.55 per share, linked to a retention rate of 50%. An interim dividend of ₏1.35 per share was paid on December 3 of last year. The balance of ₏2.20 per share will be paid on April 21, 2016.

The Gordon Growth Model relates the value of the stock to its expected dividends in the next time period (đ??ˇđ?‘ƒđ?‘†), the cost of equity (đ?‘&#x;đ?‘’ ) and the expected growth rate in dividends (đ?‘”): đ?‘‰đ?‘Žđ?‘™đ?‘˘đ?‘’ đ?‘œđ?‘“ đ?‘Ąâ„Žđ?‘’ đ?‘ đ?‘Ąđ?‘œđ?‘?đ?‘˜ = 175.53â‚Ź =

đ??ˇđ?‘ƒđ?‘† đ?‘&#x;đ?‘’ − đ?‘”

3.49â‚Ź Ă— (1 + 7.34%) 9.52% − 7.34%

During 2015, the stock was trading at 145.13â‚Ź, slightly close to our estimate. The existing difference is too small to drawn any conclusion at this stage of the report, so we prefer to relay on the result of the Discounted Cash Flow and Relative Valuation analysis.

5. Cost of Capital In order to discount the future free cash flows, the weighted average cost of capital (WACC) needs to be estimated. As it is well known, three are the critical components of the WACC: the cost of equity, the

5.1.

Capital Asset Pricing Model

The most common model used to estimate the cost of equity is the CAPM, which measures a stock's comovement with the market. The model can be summarized in the following formula: đ?‘&#x;đ?‘’ = đ?‘&#x;đ?‘“ + đ?›˝ Ă— ( đ??¸đ?‘žđ?‘˘đ?‘–đ?‘Ąđ?‘Ś đ?‘…đ?‘–đ?‘ đ?‘˜ đ?‘ƒđ?‘&#x;đ?‘’đ?‘šđ?‘–đ?‘˘đ?‘š). Before the exhibit of the results of this model, we want to focus into the specification of the inputs used.

5.2.

after tax cost of debt and the target capital structure. In the following section, we will show all the computational steps.

While we simply consider as risk free rate (đ?‘&#x;đ?‘“ ) the interest yield on a 10-years German Bund (+0.157%), for what concern the beta and the market risk premium, we have to go deeply in the details of computation.

The Beta

We estimate with three different approaches the coefficient for beta, i.e. the stock's sensitivity to the market returns.

The result shows a significant correlation between the two, and we are led to consider the title as quite risky, since strongly connected to the market trend.

First of all, we conduct a linear regression, following the OLS method, between company returns and market returns; namely, we have taken the historical weekly data for the price of LVMH's stock and the French index CAC40, hence we have computed the returns as the percentage change in price for each week from January 2012 to December 2015.

We continue our analysis computing the adjusted levered beta with the Bloomberg method, so we assess the standard weights of 2/3 for the firm beta and 1/3 for the market beta. Using a more forward-looking approach, we also determine the, so called, bottom-up levered beta: we 11


will begin with an unlevered beta and after lever the beta up using the net debt to equity ratio.

As said before, we include in the computation the net debt to equity ratio to lever the result, in order to obtain a global (operational and financial) risk measure. The beta increases, but always maintaining a figure near the market beta. This is an expected result since the company policy tends to maintain a quite constant leverage over time.

The unlevered beta considers the business groups in which the company takes place. LVMH operates in 5 sectors: Wines & Spirits, Fashion & leather goods, Watches & Jewelry, Perfumes & Cosmetics and Selective Retailing. The unlevered beta is computed estimating the average of the betas for each sector4 in the market, weighted with the revenues per business group, and it measures the operative risk. We can observe that it is very close to the sectors' betas.

5.3.

Beta Value 1,009

Adjusted

1,006

Unlevered

0,741

Levered

0,955

The Risk Premium

"In discounted cash flow valuations, the discount rates used should reflect the riskiness of cash flows. In particular, the cost of equity has to include a risk premium for equity risk." [Damodaran on valuation, 2006]

premium, we weight the results by the share of revenues in each area. The estimation of the risk premium for each country is based on the local currency sovereign rating from Moody's, i.e.:

As we have notice in our first report, one of the key strengths of the Group is strong international presence in over 70 countries, with 3,860 stores worldwide and a good geographical balance of revenues. This international feature of LVMH makes more complicated the estimation of a unique risk premium for the Group.

đ??śđ?‘œđ?‘˘đ?‘›đ?‘Ąđ?‘&#x;đ?‘Ś đ?‘…đ?‘–đ?‘ đ?‘˜ đ?‘ƒđ?‘&#x;đ?‘’đ?‘šđ?‘–đ?‘˘đ?‘š = đ??śđ?‘&#x;đ?‘’đ?‘‘đ?‘–đ?‘Ą đ??ˇđ?‘’đ?‘“đ?‘Žđ?‘˘đ?‘™đ?‘Ą đ?‘†đ?‘?đ?‘&#x;đ?‘’đ?‘Žđ?‘‘ Ă— (

đ?œŽđ??ľđ?‘œđ?‘›đ?‘‘

).

đ?‘…đ?‘’đ?‘”đ?‘–đ?‘œđ?‘›đ?‘Žđ?‘™ đ??¸đ?‘žđ?‘˘đ?‘–đ?‘Ąđ?‘Ś đ?‘…đ?‘–đ?‘ đ?‘˜ đ?‘ƒđ?‘&#x;đ?‘’đ?‘šđ?‘–đ?‘˘đ?‘š = đ??ľđ?‘Žđ?‘ đ?‘’ đ?‘ƒđ?‘&#x;đ?‘’đ?‘šđ?‘–đ?‘˘đ?‘š đ?‘“đ?‘œđ?‘&#x; đ?‘€đ?‘Žđ?‘Ąđ?‘˘đ?‘&#x;đ?‘’ đ??¸đ?‘žđ?‘˘đ?‘–đ?‘Ąđ?‘Ś đ?‘€đ?‘Žđ?‘&#x;đ?‘˜đ?‘’đ?‘Ą + đ??´đ?‘Łđ?‘’đ?‘&#x;đ?‘Žđ?‘”đ?‘’ đ??śđ?‘œđ?‘˘đ?‘›đ?‘Ąđ?‘&#x;đ?‘Ś đ?‘ƒđ?‘&#x;đ?‘’đ?‘šđ?‘–đ?‘˘đ?‘š

The following table shows all the inputs needed for the calculation:

Risk Premium for Mature Equity Market

AverageCountry Risk Premium

Tot Risk Premium

Weight of Revenues

Weighted Risk Premium

Europe GER

6,25%

3,11%

9,36%

28%

2,62%

US

US

6,25%

0

6,25%

26%

1,63%

Asia

CHI

6,92%

3,65%

10,57%

34%

3,59%

Other

SAU

6,92%

5,05%

11,97%

12%

1,44%

Tot

9,27%

Region

Mature Market

đ?œŽđ??¸đ?‘žđ?‘˘đ?‘–đ?‘Ąđ?‘Ś

The regional risk premium is computed as follows:

Since we know that LVMH operates in four different macro-regions (Europe, US, Asia and Other Markets), we compute the risk premiums for each region and, in order to obtain the total equity risk

4

OLS

Data source: Damodaran

12


5.5. 5.4.

The Cost of Equity

The Cost of Debt

For what concern the cost of debt, we refer to the following relation:

We can now conclude this section about the cost of equity showing the results:

đ?‘&#x;đ?‘‘ = (đ?‘&#x;đ?‘“ + đ??ˇđ?‘’đ?‘“đ?‘Žđ?‘˘đ?‘™đ?‘Ą đ?‘†đ?‘?đ?‘&#x;đ?‘’đ?‘Žđ?‘‘) ∗ (1 − đ?‘Ąđ?‘? )

đ?‘&#x;đ?‘’ (đ?‘‚đ??żđ?‘† đ?‘?đ?‘’đ?‘Ąđ?‘Ž) = 0.157% + 1.009(9.27%) = 9.517%

Standard & Poor's rates LVMH as an A+ obligor, rating that corresponds to a typical default spread of 1.10%5.

đ?‘&#x;đ?‘’ (đ??´đ?‘‘đ?‘—đ?‘˘đ?‘ đ?‘Ąđ?‘’đ?‘‘) = 0.157% + 1.006(9.27%) = 9.489% đ?‘&#x;đ?‘’ (đ??ľđ?‘œđ?‘Ąđ?‘Ąđ?‘œđ?‘š_đ?‘˘đ?‘?) = 0.157% + 0.955(9.27%) = 9.013%

We compute the after tax cost of debt as follows: đ?‘&#x;đ?‘‘ = (0.157% + 1.10%) ∗ (1 − 0.33) = 0.84%

5.6.

The Weighted Cost of Capital

Summing up, we have just analyzed in details all the inputs needed for the computation of our discount factor, namely the WACC. We now can offer a synthetic view, showing just the results: đ?‘&#x;đ?‘Šđ??´đ??śđ??ś =

đ??¸ đ?‘&#x;đ?‘’ ∗ (đ??¸+đ??ˇ) + đ?‘&#x;đ?‘‘

∗

đ??ˇ (đ??¸+đ??ˇ) ∗

đ?‘&#x;đ?‘Šđ??´đ??śđ??ś( đ?‘‚đ??żđ?‘† đ?›˝) = 8.640% đ?‘&#x;đ?‘Šđ??´đ??śđ??ś( đ??´đ??ˇđ??˝ đ?›˝) = 8.614% đ?‘&#x;đ?‘Šđ??´đ??śđ??ś( đ??ľđ?‘œđ?‘Ąđ?‘Ąđ?‘œđ?‘šâˆ’đ?‘˘đ?‘? đ?›˝) = 8.187%

(1 − đ?‘Ąđ?‘? )

6. Discounted Cash Flow Valuation We implement a FCFF valuation because it is the most valuable method to understand the economic situation of a company like LVMH, which characteristics are: stable growth over time, strength against market shocks and great expansion worldwide with deep investments.

this value represents how much the company invests in new operating activities. The trend is basically positive. To obtain the whole value of the expenditure to capitalize, it has been included also the Research&Development Net Value, obtaining the Adjusted Net Capital Expenditure. R&D showed a strongly increasing trend through the years, in line with the aim of the company to enlarge its position in the market.

The analysis of the Free Cash Flow to Firm begins with the computation of the Net capital expenditure,

Capex (operating invest CF) Depreciation Net capex Adj net capex

2011

2012

2013

2014

2015

1730

1702

1657

1775

1955

884

1019

1131

1331

1563

846

683

526

444

392

783,584

615,945

455,58

366,648

295,95

With this computation we see that the trend of the net expenditures in investments is dramatically 2011 R&D R&D net

Data source: Damodaran

2012

2013

2014

2015

63

68

71

79

97

62,42

67,05

70,42

77,35

96,05

The Non cash working capital has been computed by the difference between Inventories, Accounts receivable and the value of the Accounts payable.

5

decreasing over the years considered, thanks to a depreciation positively inclined.

Company's working cash could not be implied in the computation since it is utterly attributed to financing operations (cfr Report1). Changes in Non Cash

13


Working Capital are always positive, demonstrating a reliable stability of the company. Change in WC

2012

2013

2014

2015

534

810

720

618

The percentage of the WC on revenues permits us to standardize the changes in the working capital. In

fact, we calculated an average ratio for the years that we will use for the future forecasts.

2011

2012

2013

2014

2015

Revenues

23659

27970

29016

30638

35664

WC/revenues

2,26%

2,90%

2,48%

2,02%

1,20%

Average Rate

2,17%

An important starting point for our DCF method is the computation of the Adjusted after tax EBIT. Our company's EBIT presents an erratic trend, but in generally positive inclination. The after tax EBIT has been calculated subtracting the value of the tax rate EBIT EBIT AT Adj EBIT AT

2011

2012

2013

2014

2015

5160

5742

5898

5431

6348

3457,2

3847,14

3951,66

3638,77

4253,16

3394,78

3780,09

3881,24

3561,42

4157,11

Return on capital has been calculated as follows đ?‘…đ?‘‚đ??ś =

used in our whole report (33%). In the computation of the adjusted Ebit after tax it is really important to consider the effect of the net R&D expenses, because they need to be treated as capitalizing expenses.

đ??´đ?‘‘đ?‘—đ?‘˘đ?‘ đ?‘Ąđ?‘’đ?‘‘ đ??¸đ?‘?đ?‘–đ?‘Ą đ?‘…đ?‘–đ?‘ đ?‘˜ đ??ľđ?‘’đ?‘Žđ?‘&#x;đ?‘–đ?‘›đ?‘” đ??śđ?‘Žđ?‘?đ?‘–đ?‘Ąđ?‘Žđ?‘™ + đ??źđ?‘›đ?‘Ąđ?‘’đ?‘&#x;đ?‘’đ?‘ đ?‘Ą đ??ľđ?‘’đ?‘Žđ?‘&#x;đ?‘–đ?‘›đ?‘” đ??śđ?‘Žđ?‘?đ?‘–đ?‘Ąđ?‘Žđ?‘™ − đ??śđ?‘Žđ?‘ â„Ž đ?‘Žđ?‘›đ?‘‘ đ??¸đ?‘žđ?‘˘đ?‘–đ?‘Łđ?‘Žđ?‘™đ?‘’đ?‘›đ?‘Ąđ?‘ 

For the considered years it shows a basically positive trend with slight dips, the most relevant during 2013, most likely for the economic crisis of the year. The company responds in the successive two years rising

ROC

effectively the return on capital with a peak around 14%. The forecasted period, instead, does not allow a very optimistic comment, since the value of the return on capital is expected to plunge over years, probably due to the decreasing disposition of the company to transform capital in profitable investments, as confirmed also in the declining net capital expenditures. Nevertheless, it is expected not to fall under 5%.

Forecasted ROC

16,000%

15,00%

14,000%

10,00% 5,00%

12,000%

0,00%

10,000% 2011 ROC

2012

2013 2014 2015 Lineare (ROC)

We calculate the Adjusted Reinvestment Rate as (đ?‘ đ?‘’đ?‘Ą đ??śđ?‘Žđ?‘?đ?‘’đ?‘Ľ + đ??śâ„Žđ?‘Žđ?‘›đ?‘”đ?‘’ đ?‘Šđ??ś) â „ đ??´đ?‘‘đ?‘— đ??¸đ??ľđ??źđ?‘‡ đ??´đ?‘‡

Forecasted ROC

The values of the reinvestment decline over the years considered. The rate reaches an average value of 32.36%, it is not too high but it allows to consider a positive expected growth.

14


Adj EBIT AT

2011

2012

2013

2014

2015

3394,78

3780,09

3881,24

3561,42

4157,11

846

683

526

444

392

Net Capex ∆WC Adj reinvestment rate

534

810

720

618

429

40,65%

39,50%

32,10%

29,82%

19,75%

Now we have all the inputs for the computation of the future FCFFs. We apply the following procedure:

expenditure and depreciation we assume a constant growth of 3.13% (which represents the average growth rate per year), and for the change in non cash working capital the assumption is a constant rate of 0,4%, it is not so high since the strategy of the company is to maintain this value pretty stable.

đ??šđ??śđ??šđ??š = đ??¸đ??ľđ??źđ?‘‡ đ??´đ?‘‡ − đ?‘ đ?‘’đ?‘Ą đ??śđ?‘Žđ?‘?đ?‘’đ?‘Ľ − ∆đ?‘Šđ??ś

Ebit growth rate follows the trend underlined in the pro-forma financial statement, while for capital FORECAST

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

EBIT

7066

7703

8396

8773

9167

9578

9959

10306

10613

10877

4734,22

5161,01

5625,32

5877,91

6141,89

6417,26

6672,53

6905,02

7110,71

7287,59

404,30

416,98

430,07

443,56

457,48

471,83

486,63

501,90

517,65

533,89

EBIT AT NET CAPEX CHANGE NWC FCFF

430,86

432,73

434,61

436,50

438,39

440,30

442,21

444,13

446,06

447,99

3899,06

4311,29

4760,64

4997,85

5246,02

5505,13

5743,69

5958,99

6147,00

6305,70

In the forecasting of the FCFFs we used the 4 stages model, because the growth rates estimated for the

Ebit presented different future trends as the graph evidences:

Ebit Growth Rate 12,00% 10,00% 8,00% 6,00% 4,00% 2,00% 0,00% 2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

Growth Rate

 Initially it is expected to dip slightly; thanks to the fine economic period, we estimate that the company will succeed to maintain a good rate of about 9% till the successive three years.  It could be easily predicted that after a flourishing period of growth and investments the efficiency of the company could benefit from the previous investment without increasing further the expenditure; Earnings Before Interest and Taxes is expected to fall dramatically standing at a level of growth of about 4% (still positive).

 It reaches a mid-level stabilizing over years in the central period forecasted, presenting nevertheless a sustainable growth.  In the last stage it continues to decrease slowly, reaching a value close to the expected long period growth rate of the economy. The objective of the analysis is now to estimate the Enterprise Value; it is necessary to compute first the Terminal Value of the cash flows as follows: đ?‘‡đ?‘’đ?‘&#x;đ?‘šđ?‘–đ?‘›đ?‘Žđ?‘™ đ?‘‰đ?‘Žđ?‘™đ?‘˘đ?‘’ =

∗ (1 + đ??şđ?‘&#x;đ?‘œđ?‘¤đ?‘Ąâ„Ž đ?‘…đ?‘Žđ?‘Ąđ?‘’) đ?‘Šđ?‘Žđ?‘?đ?‘? − đ??şđ?‘&#x;đ?‘œđ?‘¤đ?‘Ąâ„Ž đ?‘…đ?‘Žđ?‘Ąđ?‘’

đ??šđ??śđ??šđ??š2025

15


With the cumulative cost of capital, we proceed to discount each cash flow in order to obtain the present value.

The terminal value is 113230,87 million euros. Growth Rate is the one estimated for 2025 (2.48%), while Wacc is the one computed before (8.178%).

Cost of capital Cumulative cost of capital PV

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

8,19%

8,19%

8,19%

8,19%

8,19%

8,19%

8,19%

8,19%

8,19%

8,19%

1,08

1,16

1,25

1,33

1,41

1,49

1,57

1,65

1,74

1,82

3604,00

3704,69

3821,94

3764,92

3722,30

3691,70

3651,21

3600,68

3539,21

3467,15

The enterprise value is computed discounting the terminal value for the Wacc and adding the present values obtained: đ??¸đ?‘›đ?‘Ąđ?‘’đ?‘&#x;đ?‘?đ?‘&#x;đ?‘–đ?‘ đ?‘’ đ?‘‰đ?‘Žđ?‘™đ?‘˘đ?‘’ = đ?‘‡đ?‘’đ?‘&#x;đ?‘šđ?‘–đ?‘›đ?‘Žđ?‘™ đ?‘‰đ?‘Žđ?‘™đ?‘˘đ?‘’ ∗ (1 + đ?‘Šđ?‘Žđ?‘?đ?‘?10 ) + ∑ đ?‘ƒđ?‘&#x;đ?‘’đ?‘ đ?‘’đ?‘›đ?‘Ą đ?‘‰đ?‘Žđ?‘™đ?‘˘đ?‘’đ?‘  = 88116,05 millionâ‚Ź

To conclude the analysis and obtain the Equity Value, it is necessary to adjust it for Cash, Minority interest and other Debt. The obtained value is 74013,05 million euros. Dividing this result for the number of shares in the market (507139110) we have that the price for share is 145,94. This result confirms the market value for the company, whose shares are priced 145,13 euros. Terminal Value

113230,87

Enterprise Value

88116,053

Cash

3594

Minority interest

1460

Other Debt EQUITY VALUE SHARE

16237 74013,05 145,94

To have a wider picture of the price dynamic, we can compare the results arisen from the bull and bear cases too. Taking into account that the assumptions made in both scenarios have a significant impact on

the size and the structure of the company, the analysis of the price’s deviations from the base case allows us to evaluate the financial impact of possible up- and down-swings in the company’s performance.

From the discounted cash flow methodology, we can see how the price per share changes considerably both in the optimistic and pessimistic scenario. Regarding the bull case, the adjustment of +2% made in the growth rate is reflected in the +23% increase of the price per share. On the other hand, the critical slow growth that we assumed in the pessimistic scenario causes a decrease of 24.5% with respect to the base price. The results show an undervaluation of the company in the bull case and an overvalued price in the bear scenario with respect to the market quotation. The last one is clearly due to the accentuated stagnant growth of the pessimistic scenario, which we believe could occur with a small probability. Nevertheless, these outcomes are still consistent with our conclusions, demonstrating LVMH’s ability to stand and overcome even periods of flat growth without losing too much intrinsic value.

16


7. Relative Valuation Our analysis will now concern Relative Valuation, which objective is to value an asset in relation to how similar assets are currently priced by the market. The first step of this valuation has been finding the right competitors, which has been difficult to do since no assets are exactly identical. For this reason, we made two analysis based on different assumptions: the former takes into account firms within the same

Companies

Earnings per share

P/E

sector, while the latter specifically focuses on firms with similar beta and similar average ROE of the past five years, still in the same sector. However, because of the particular and extensive composition of LVMH, it has been a challenge to accurately find comparable firms. Since most analysts define firms in the same business to be comparable, we are implicitly assuming that they are equally risky.

Earnings per share (5Y)

PEG

P/BV

EV

EV/REVENUES

EV/EBITDA

LVMH Moët Hennessy Louis Vuitton

7,08

20,31

2,29

8,86

2,97

76,39

2,14

9,49

Compagnie Financière Richemont

3,17

19,59

17

1,15

2,24

26,14

2,38

8,76

Hermès International Société

8,84

35,8

18,28

1,96

10,33

31,59

2,34

8,61

Luxottica Group SpA

1,88

28,56

14,98

1,9

4,24

27,28

2,71

12,46

Kering

5,52

25,72

-1,47

-17,49

1,66

22,9

1,98

10,8

The Swatch Group

20,7

13,37

0,22

3,62

1,34

13,66

1,57

7,28

Ralph Lauren Corp.

4,88

15,74

-3,82

-4

1,69

6,07

0,82

5,32

Coach Inc.

1

23,52

-7,95

-2,95

3,55

8,81

2,034

9,33

Prada S.p.A

0,25

20,05

5,04

3,97

2,18

7,94

1,96

8,84

1

12,6

14,97

0,84

3,23

6

1,63

7,33

Michael Kors Holdings Ltd.

3,83

8,55

81,91

0,104

3,51

6,02

1,3

4,43

PVH Corp.

6,09

10,7

47,35

0,22

1,33

8,34

1,04

7,92

Pernod-Ricard

3,61

26,5

-2,11

-12,55

1,85

34,64

3,89

13,7

Estee Lauder Cos.

2,74

26,42

16,65

1,58

8,1

30,99

2,78

14,69

Diageo Plc

5,03

16,89

6,55

2,57

5,13

72,21

4,74

15,42

L’Oreal group

5,84

27,32

9,04

3,02

3,78

88,43

3,5

16,98

Groupe Laurent-Perrier

3,98

18,09

16,65

1,08

1,2

745,17

3,12

15,73

Brown-Forman Corporation

2,92

26,05

9,81

2,65

12,35

18,57

5,99

16,57

Tod's SpA

3,03

18,73

-3,19

-5,87

1,98

1,55

1,48

7,84

Remy Cointreau

1,97

35,79

1,07

33,44

3,19

3,88

3,91

21,47

AVERAGE

4,68

21,52

12,16

1,19

3,79

61,83

2,57

11,15

Burberry Group

In this first analysis we consider a sample of twenty big companies belonging to the Luxury Goods Sector. The above chart outlines that the French Group has a P/E Ratio of 20.31, a value close to the average of the sample of competitors considered, which is 21.52. This may suggest a fairly valuation of LVMH, however is not enough (or may not be reliable) to assert that the firm’s assets is currently equally priced by the market. A further confirmation is given by the Enterprise Value (EV) and its ratio

with Revenues (EV/REVENUES) and with EBITDA (EV/EBITDA): we see in fact all these value close to their average. In addition, the same conclusion is given by the P/BV ratio, strongly confirming the pricing. An alternative method to the conventional practice of defining comparable firms requires looking for firms that are similar in terms of valuation fundamentals.

17


Companies

Beta

Earnings per share (5Y)

P/E

LVMH

1,009

2,29

20,31

Compagnie Financière Richemont

1,21

17

19,59

Kering

0,99

-1,47

25,72

The Swatch Group

1,19

0,22

13,37

Ralph Lauren Corp.

0,85

-3,82

15,74

Coach Inc.

0,822

-7,95

23,52

Burberry Group

1,13

14,97

12,6

Michael Kors Holdings

0,82

81,91

8,55

PVH Corp.

0,96

47,35

10,7

Pernod-Ricard

0,86

-2,11

26,5

Estee Lauder Cos.

0,84

16,65

26,42

We will now analyze a sample of firms, still within the same sector, but with similar Beta. We use beta as our measure of equity risk, in fact an analysis made without controlling for differences in risk, may be biased. Since our objective is to explain those differences underlined by fundamentals, we will use only variables that are related to those fundamentals.

Considering the P/E ratio, it is determined by the expected growth variables (EPS 5Y) and risk (Beta), then we will include only those variables in the regression.

The reliability of this regression may be seen by a Rsquared of 54%, a notable value.

We can observe how the values of P/E given by the market and the one we calculated in the regression are quite similar, confirming the fair pricing.

đ??żđ?‘‰đ?‘€đ??ť đ?‘ƒđ??¸ đ?‘…đ?‘Žđ?‘Ąđ?‘–đ?‘œ = 20,31 đ??¸đ?‘Ľđ?‘?đ?‘’đ?‘?đ?‘Ąđ?‘’đ?‘‘ đ?‘ƒđ??¸ đ?‘…đ?‘Žđ?‘Ąđ?‘–đ?‘œ = 36,38659 − 0,173176 ∗ đ??¸đ?‘ƒđ?‘†5(đ?‘Œ) − 15.78986 ∗ 1,009 = 20.058004822

We will now run a regression on Eviews considering, as independent variable, the expected EPS growth rate and the beta.

We will now make a further analysis considering the P/BV ratio. The multiple that is most closely connected to Price to Book Value is the Return on Equity ratio, calculated over the past five years.

đ?‘‰đ?‘Žđ?‘™đ?‘˘đ?‘Žđ?‘Ąđ?‘–đ?‘œđ?‘› đ?‘œđ?‘“ đ??żđ?‘‰đ?‘€đ??ť = (đ?‘ƒđ??¸ đ?‘&#x;đ?‘Žđ?‘Ąđ?‘–đ?‘œ/ đ??¸đ?‘Ľđ?‘?đ?‘’đ?‘?đ?‘Ąđ?‘’đ?‘‘ đ?‘ƒđ??¸) − 1 = 0,0125

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ROE Companies

Beta

Earnings per share (5Y)

P/BV

(5Y avg)

LVMH MoĂŤt Hennessy Louis Vuitton

1,009

2,29

2,97

16,48

Compagnie Financière Richemont

1,21

17

2,24

16,9

Kering

0,99

-1,47

1,66

8,88

The Swatch Group

1,19

0,22

1,34

14,37

Ralph Lauren Corp.

0,85

-3,82

1,69

15,47

Coach Inc.

0,822

-7,95

3,55

35,07

Burberry Group

1,13

14,97

3,23

25,87

Michael Kors Holdings

0,82

81,91

3,51

40,99

PVH Corp.

0,96

47,35

1,33

9,08

Pernod-Ricard

0,86

-2,11

1,85

9,73

Estee Lauder Cos.

0,84

16,65

8,1

28,14

We run a regression on EViews considering, as independent variable, the expected EPS growth rate, the Beta, and the past five years’ average ROE.

đ??żđ?‘‰đ?‘€đ??ť đ?‘ƒ/đ??ľđ?‘‰ = 2,97 đ??¸đ?‘Ľđ?‘?đ?‘’đ?‘?đ?‘Ąđ?‘’đ?‘‘ đ?‘ƒ â „đ??ľđ?‘‰ đ?‘…đ?‘Žđ?‘Ąđ?‘–đ?‘œ = 3,071690 − 0.011562 ∗ đ??¸đ?‘ƒđ?‘†5(đ?‘Œ) + 0,10583 ∗ 16,48 − 2,227980 ∗ 1,009 = 2,54127608

Similarly, to the analysis of the P/E ratio, we can observe how the values of P/BV given by the market and the one we calculated in the regression are quite the same, confirming, again, the fair pricing. The reliability of this regression may be seen by a Rsquared of 39%.

đ?‘‰đ?‘Žđ?‘™đ?‘˘đ?‘Žđ?‘Ąđ?‘–đ?‘œđ?‘› đ?‘œđ?‘“ đ??żđ?‘‰đ?‘€đ??ť = (đ?‘ƒ/đ??ľđ?‘‰ đ?‘&#x;đ?‘Žđ?‘Ąđ?‘–đ?‘œ/ đ??¸đ?‘Ľđ?‘?đ?‘’đ?‘?đ?‘Ąđ?‘’đ?‘‘ đ?‘ƒ/đ??ľđ?‘‰) − 1 = 0,168704

19


8. Recommendations Why you should have LVMH in your portfolio? At the end of this valuation, we are able to answer this question. First of all, we have estimated through the Discount Cash Flow methodology the price of the share (â‚Ź145.94) that is very close to the actual one (â‚Ź145.13). The result is quite significant: the stock appears to be fairly priced by the market. Further confirmations are observable through the Relative Valuation, which revealed, again, the fair pricing. Hence, our valuations assure about the effectiveness of the market's reflection of the true value of the company. We obtain consistent results that make an investor confident on LVMH's reliability in the market, also knowing that the company is the perfect example of a continuously positive growth, able to react and survive to external shocks. The knowledge of the company's features is an important starting point for any investment decision and, at this point, we could arrive at our recommendation: STRONG HOLD/BUY.

"Know what you own, and know why you own it." Peter Lynch

20


References [1] Bain & Company, Luxury Goods Worldwide market study, 2015. [2] CMA Ontario, Pro Forma Financial Statements. [3] Credit Suisse, LVMH analysis, 2014. [4] Euromonitor International, Luxury goods market in 2016. [5] Mira, Case of a Merger Between LVMH and HERMĂˆS, 2014. [6] http://ashleymg330.wikidot.com/industry-financials [7] http://finance.yahoo.com [8] http://wwd.com/business-news/forecasts-analysis/lvmh-richemont-fashion-apparel-ranking-10303382/ [9] http://www.bloomberg.com/professional/blog/emea-luxury-goods-2015-outlook-will-digital-sales-spurgrowth/ [10] http://www.eviews.com/.html [11] http://www.reuters.com/finance/stocks [12] http://www.statista.com/statistics/487444/cagr-of-the-global-luxury-goods-market-by-region/ [13] http://www.transparencymarketresearch.com/pressrelease/luxury-goods-market.htm [14] https://data.oecd.org/gdp/gdp-long-term-forecast.htm


Lvmh report 2