Luxury behemoth LVMH may be worth more if it’s carved up
When Bernard Arnault presents LVMH’s annual earnings on Thursday, investors and analysts will be hanging on to his every word as they try to decipher the direction of top-end demand. Yet, LVMH is being penalized by shareholders for its disparate collection of businesses. Breaking up the behemoth could release significant value for investors.
It might, incidentally, help solve the looming succession issue as founder and CEO Arnault comes closer to handing over the reins to the next generation. LVMH suffers from a conglomerate discount, because not only does it include its two biggest brands, Louis Vuitton and Dior, but it also has watches and jewellery, cosmetics, wines and spirits, duty-free retailing and hospitality. Shares in LVMH trade on about 16 times this year’s estimated earnings before interest and tax, less than half of Hermes International SCA’s 34 times.
Some discount to Hermes is warranted. The Birkin bag maker can, in effect, control demand for its iconic products. Meanwhile, LVMH’s valuation could also reflect concerns that its scale means there’s less room to grow and that Dior is decelerating after a remarkable run.
Nevertheless, the market mark-down looks harsh. After all, Louis Vuitton is expected to generate €12.3 billion ($13.4 billion) of operating profit this year, an impressive 51.8% of sales, according to HSBC Holdings estimates. But even on the simplest break-up valuation, the rationale for a split is compelling.
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