Why LVMH Is the Best Over-the-Counter Stock You Can Buy

I received an email recently from eMarketer discussing the percentage of U.S. millennial consumers who purchased a luxury item in 2021. According to their research, the answer was 63%. Gen Z was the second-highest purchaser of luxury items at 60%. 

If I’m LVMH (LVMUY) CEO Bernard Arnault, I’m ecstatic about this statistic. That’s because it demonstrates the long growth runway it has. In 2021, LVMH had revenue of 64.2 billion euros ($68.3 billion), 44% higher than 2020 and 20% above 2019. 

While no company is immune to economic downturns, if there’s a business that could withstand a recession, LVMH would be it. Its portfolio of brands and business segments is very diversified. 

And though I rarely recommend over-the-counter stocks because they often come with little liquidity, LVMH is a rare exception. Here’s why I feel this way.

LVMH Diversification Is Key

In 2021, the company’s five operating segments each accounted for at least 9% of its overall revenues, led by its Fashion & Leather Goods, which accounted for 48% of sales. This segment’s brands include Louis Vuitton, Christian Dior Couture, Fendi, Marc Jacobs, etc. 

More importantly, it is the driver of profits with an operating margin of 41.6%. In 2021, it had operating profits of 12.8 billion euros ($13.6 billion). If it were an S&P 500 constituent, it would be the 13th largest by profits.    

Like a well-oiled sports team, each of its five operating units chips in at different times to keep the overall business profitability. 

In 2021, its Selective Retailing unit, which includes Sephora, Le Bon Marche, DFS (Duty-Free Shop), and Starboard Cruise Services, had almost 12 billion euros ($12.8 billion) in revenue but an operating margin of just 4.5%. That’s due to Covid-19 and the restricted travel over the past two years. However, in 2019, the unit had 14.8 billion euros ($15.7 billion) in sales with an operating margin of 9.4%, more than double this past year. 

Thanks to its acquisition of Tiffany in 2021 for $15.8 billion, the company’s Watches and Jewelry division had a record year in 2021 with 9.0 billion euros ($9.6 billion) in sales and an operating margin of 18.7%. It might not hold a candle to the 41.6% operating margin for Fashion and Leather Goods, but it was substantially higher than previous years. 

As a result, four of five segments had double-digit operating margins in 2021. 

As I said, it’s a well-oiled machine. 

Rumored to Be Interested in Ralph Lauren 

For the record, the Axios rumor LVMH was interested in buying Ralph Lauren (RL) that made the rounds in early March has generally been debunked as wishful thinking or a figment of somebody’s imagination. 

According to reports from the Business of Fashion, LVMH wouldn’t be interested in Ralph Lauren’s lower margins, and founder and Executive Chairman Ralph Lauren isn't interested in selling despite being 82. Instead, as Cassius points out, a better fit would be PVH Corp. (PVH), the owners of Calvin Klein and Tommy Hilfiger. 

That’s an accurate assessment. LVMH’s operating margin in 2021 was 26.7%, almost double Ralph Lauren’s at 13.7%. PVH’s are nearly 10%. 

However, like the Tiffany acquisition, LVMH desires to increase its revenue in the U.S. market. It currently accounts for 26% overall, much of that from the Tiffany acquisition. I’m sure it would like to get its U.S. business to an equal footing with Asia, which accounts for 42% of revenue if you include Japan.

Lululemon (LULU) is a much better fit for LVMH would be Lululemon (LULU) because its target audience skews higher on the price point than Ralph Lauren. However, LULU would cost more than 6x what it would have to pay for Ralph Lauren and 3x what it paid for Tiffany last year. 

Never say never. 

What’s LVMH’s Valuation Like?

Its stock currently trades at 4.8x sales, a little higher than its five-year average. However, the multiple is lower than what investors were willing to pay in 2021 at 6.7x. Down 19.2% year-to-date, you’d be getting its stock at a fair price given its growth potential. 

In the first quarter ended March 31, LVMH grew sales by 29% over last year to 18.0 billion euros ($19.2 billion). Excluding acquisitions, organic growth was 23%. Except for its Wines & Spirits segment, which continues to suffer from supply-chain issues, all four of its other segments had double-digit sales growth during the quarter, with Fashion & Leather Goods up 30% on an organic basis.   

Here’s what the company had to say about its quarter:

“In the current geopolitical context and in light of the ongoing impact of the pandemic, LVMH remains both vigilant and confident at the beginning of this year. The Group will continue to pursue its strategy focused on the development of its brands, driven by strong innovation and investment as well as a constant quest for quality in its products and their distribution.”

As all smart businesses do, it underpromises and will likely over-deliver. 

One metric that I use to judge a stock’s value is free cash flow (FCF) yield. It is defined as FCF divided by market cap or enterprise value. Some people use enterprise value -- market cap plus long-term debt minus cash -- to calculate FCF yield. I prefer it because it considers the company’s entire capital structure, but either works. 

So, in 2021, it had FCF of 13.5 billion euros ($14.4 billion) and net financial debt of 9.6 billion euros ($10.2 billion). Based on a current market cap of $324.5 billion, its enterprise value is $334.7 billion, with an FCF yield of 4.3%. I consider anything between 4% and 8% to be fair value. 

If you’re looking to own one of the better run global businesses, you can’t go wrong with LVMH. It’s an excellent long-term buy despite trading over the counter.