16 August 2017

Standing on the Shoulders of Giants: Do We See Further? LVMH vs L’Oréal

LVMH, a shining star – Earlier this year, LVMH became the French largest capitalization, the ultimate accolade for a luxury group which sales and market value have increased 10-fold over the last 2 decades. Revisiting this stellar trajectory with Sismo offers the opportunity to illustrate the variability of returns on the stock market, from which even an overachiever like LVMH cannot claim to be immune.

LVMH Market Capitalization since January 1988

Rolling 5-year return – The orange line on the Sismo screen below starts at the bottom 24 years ago, at mid-year 1993. LVMH had been created 5 years before, through the merger of Louis Vuitton and Moët Hennessy in 1987. The orange line indicates (i) the 5-year return of an investment in LVMH along the X axis (i.e. the stock performance over the previous 5 years with reinvested dividends) and (ii) the market capitalization of LVMH along the Y axis (using for both indicators a 6-month rolling average to smoothen the profile).

So starting at the origin at 30 June 1993 (with a 131% 5-Y total return and a market capitalization of €8.5bn), follow the 24-year timeline upward to reach the current LVMH position (at 30 June 2017), with €104bn capitalization and 106% 5-year total return (still based on a 6-month rolling average).

LVMH 5-Year Total Return (X) vs Market Capitalization (Y) since 30 June 1993 – 6-Month Rolling Average

Bumpy road – Despite the general upward trend, this is quite a bumpy road. Calculated over this 24-year period, the average 5-year return is an impressive 85% but it comes with a standard deviation of 67%. In early January 2005, the 5 year-return reached -35%. After 9/11, on 21 September 2001, the 1-year return was -65%. Not a safe-harbor then.

L’Oréal, another French success story. The history of the 5-year return profile is similar to the one observed on another French blue-chip, L’Oréal: a lost decade (2000-2010) coming after shining 1990s and there again followed by an impressive rally allowing the doubling of the market value over the last five years…

L’Oréal Market Capitalization since January 1988

On the chart below, the orange line indicates L’Oréal five-year return (X-axis) alongside its market capitalization (Y-axis). Notice the bunch of aggregated dots over the 2004-2013 period, before the happy exit from the top in 2013 followed by a continuous upward move.

L’Oréal 5-Year Total Return (X) vs Market Capitalization (Y) since 30 June 1993 – 6-Month Rolling Average

So what will come next? The sell-side analysts that cover LVMH seem a bit puzzled after the recent rally. The target they’re setting for the stock price in the short/mid term is below current price and such a discount is a rare thing for LVMH as shown in the Sismo screen below. It displays the sell-side consensus target price premium (X axis) vs market capitalization (Y axis) since 2002 (still with a 6-months rolling average).

LVMH Consensus Target Price Premium (X) vs Market Capitalization (Y) since January 2003 – 6-Month Rolling Average

Circling expectations – Actually, L’Oréal does not offer more comforting prospects, but at least the pattern shows a certain experience of going in circles in the -5%/+5% range in stock price expectations…

L’Oréal Consensus Target Price Premium (X) vs Market Capitalization (Y) since July 2003 – 6-Month Rolling Average

Managing modest analyst expectations for years while driving market value to such heights is quite an impressive achievement, the kind of challenge that LVMH may wish to take up from now on…