The French luxury empire, LVMH (OTCMKTS: LVMHF), caught the market’s attention once it was revealed that the company’s CEO, Bernard Arnault, bought $32 million worth of shares in just three months.
Peter Lynch once said that insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise. Therefore, it’s obvious why Arnault’s insider buying makes the stock worth considering. However, there are still several challenges facing LVMH, and they are so significant that even this insider buying activity might not be enough to offset them. In light of these factors, is LVMH stock a great investment opportunity?
Global Luxury Market Slowdown
Arnault appears to be incredibly bullish on his company, especially when you consider the fact that his most recent purchase, which happened on the 28th of November last year, values LVMH stock at $738.21 per share, which is higher than what it’s currently trading at around $721.66.
This move can only mean one thing: Arnault thinks that LVMH is undervalued right now and expects it to go up in the future. But, is that the real case?
Before we get into that, we must first look at the recent performance of the luxury goods empire. In the past few months, the company has been uncharacteristically slow. In fact, LVMH stock has been down by 26.99% for the past six months and is currently really close to its 52-week low.
This bad performance has to do with the increasing fear regarding a broader slowdown in the global luxury goods market. This market, which has seen robust growth over the past few years, is expected to face a challenging environment in 2024, according to the Swiss investment bank, UBS Group AG (NYSE: UBS).
UBS analysts predict that organic sales growth in the luxury goods market will decrease to around 6%, compared to the 10% growth experienced since 2016. Analysts attributed this slowdown to factors such as less favorable macroeconomic conditions and the risk of a potential global recession in 2024.
For LVMH in particular, UBS forecasted a 5% organic sales growth for its fashion and leather goods division in 2024, lower than the sector average. UBS attributes this to the economic slowdown in China, which is a big market for LVMH.
The Positives
For starters, the company is still producing decent numbers, even during times when a market slowdown is expected. It reported a 9% year-on-year organic revenue growth in Q3 of 2023, which isn’t a bad figure on its own or when compared to its peers.
For example, Burberry (OTCMKTS: BBRYF) reported a 1% year-on-year growth, while Gucci owner Kering (OTCMKTS: PPRUF) actually saw a 9% decline in Q3.
Another positive aspect of LVMH is its strong presence in the Chinese luxury market. The luxury goods market in China is worth $56 billion, and it’s expected to grow at an annual growth rate of 3.92% until 2028. China has large and growing middle and high-income classes with a growing appetite for luxury goods, and this benefitted LVMH in particular.
In fact, 22% of the company’s total revenues came from China in 2022, making it the company’s largest market. Also, China opening up and lifting its Zero-Covid restrictions boosted the company’s sales in Asia by 34%.
The Challenges in China
LVMH started facing challenges in China in Q3, especially as the country’s economic problems worsened.
Analysts’ concerns about LVMH’s future in China were increased when the sales growth in Asia, excluding Japan, dropped from 34% in Q2 to 11% in Q3 of 2023.
However, these concerns were dismissed by the LVMH’s CFO, Jean-Jacques Guiony. He said the drop in growth in the region’s sales is thanks to Chinese customers returning to traveling abroad again after China ended its Zero-Covid restrictions in early 2023.
He also justified this by saying that Chinese customers made about 30% of their LVMH purchases outside of China in 2023, twice the percentage of last year.
In general, LVMH isn’t too worried about its position in the Chinese market, as sales to Chinese consumers from the company’s key fashion and leather goods division were up 40% year-on-year in Q3.
The Challenges in the U.S.
The company’s decent performance in China doesn’t mean that LVMH is completely out of the woods because Q3’s 9% growth represented a sizable slowdown on the 17% growth reported in Q1 and Q2.
This is likely thanks to the dramatic slowdown in the U.S. market, as U.S. organic sales were up by just 3% year-on-year in Q3, compared to double-digit numbers for every other region.
LVMH blamed the slow U.S. performance on American consumers, feeling a strain on the U.S. economy. While this is an important factor to consider, as some American consumers started expressing caution about overspending because of uncertainties about the economy, it’s important to note that organic sales for LVMH in the U.S. only ever saw double-digit growth in 2022.
The pandemic stimulus payments possibly supercharged this. In fact, a quarter after the checks were distributed, people earning less than $50,000 a year spent 46% more on luxury fashion than they did in the same period of 2019, according to Bank of America.
This trend died out, and luxury brands that saw impressive U.S. sales in 2022 are seeing slow growth. This is a problem facing other brands like Kering, which saw a 16% decrease in U.S. sales, and Richemont (OTCMKTS: CFRHF), which saw a 2% drop.
If anything, it’s odd that LVMH blamed the slow U.S. growth on economic uncertainties in the U.S., when single-digit growth rates have been the norm in its American market since even before the pandemic.
Look at the company’s Q3 U.S. sales growth rates, for example. In 2016, sales grew by 6%; in 2017, the rate fell to 3%; in 2018, it was 9%, but it fell to 8% in 2019. All single-digit and in line with the growth the company is seeing right now.
Returning to the stimulus-boosted growth in the U.S. in 2022 seems unlikely, as Americans prefer exclusive luxury brands rather than accessible ones like what LVMH tried to offer. This is shown in the 20% increase in the sales of Hermes (OTCMKTS: HESAF), while LVMH, Kering, and Richemont were experiencing slow growth.
LVMH Stock Forecast
Since LVMH is experiencing a slowdown in its growth, a drop in its stock, and a potential slowdown in the market in the future, it could be possible that Arnault’s insider buying is a play to bring attention to LVMH stock in order to boost it.
Either that or he has insider information about an acquisition we don’t know about, so this alone isn’t enough to determine if the stock is offering a good investment opportunity. However, we could still look at other factors to decide.
For starters, the company shows financial health despite this slowdown. It has enough cash that it could use to allocate more money to dividends, pay down debt, and grow opportunities such as more mergers or acquisitions, as shown in its substantial free cash flow. It generated a free cash flow of $9 billion in the last 12 months, which is much better than its peers, Burberry with $759 million, and Kering with $1.2 billion.
Even though the free cash flow fell from $11 billion in the first half of the year, it was because the company was making heavy investments in its alcohol and jewelry divisions, so free cash flow will likely pick up again over the long run.
And if you’re an investor who’s interested in long-term growth, then LVMH’s dividend would be very attractive for you. It has a dividend yield of 1.93%. Its dividend growth is also astonishingly fast, as it grew by 20% in the past year, 19% in the last five years, and 14% in the last 20 years.
Besides that, even though UBS expressed concerns about a recession in 2024, luxury brands like LVMH stayed resilient through periods of economic slowdowns, as demonstrated in how fast LVMH picked itself up during the pandemic globally.
This is because most luxury brands have an established customer base that wouldn’t mind an increase in inflation or anything of that sort if they’re willing to spend tens of thousands on a handbag.
Another bullish aspect is the Wall Street Forecast for the stock over the next 12 months, with analysts putting a price target of $927.09 on LVMH stock, a 31% premium on its current price.
Therefore, we could say that LVMH is a great company for long-term growth or dividend investors who are fine with the risk of a slowdown in the market, especially since the strength of the company’s brands positions it well to withstand the market headwinds.
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