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(B)(N) LVMH Moet Hennessy Louis Vuitton SA

August 25, 2013

Deal Book. The makers of rare or luxury goods are actively working to secure their future by securing their supply line in both material and skills (Reuters, August 23, 2013, Big brands race to secure luxury supplies from reptiles to roses).


Courtesy: Moet Hennessy Louis Vuitton SA

For example, Moet Hennessy Louis Vuitton has just completed the purchase (for 2 billion euros, about $2.7 billion) of 80% of Italy’s Loro Piana which is one of the world’s top cashmere makers and herds its own Andean llama-like vicunas.

It’s expected (ibid, Reuters) that Loro Piana will eventually supply only LVMH brands, such as Fendi and Céline, and stop supplying rivals with the fleeces of the 25 to 30 animals required to make one overcoat that sells for around 14,000 euros in Milan (which is not getting any warmer, by recent reports).

LVMH also spent 60 million euros in 2011 to buy the watch dial maker, ArteCad, and another 47 million euros for 51 percent of Singapore-based Heng Long, a crocodile leather tannery, and has about $1.5 billion euros to spend on other purchases that will secure its supply line, maintain the quality of its products, and, incidentally, raise barriers to entry for competitors.

The company is traded on the Paris Bourse (LVMH), but the stock can also be purchased in New York in the over-the-counter market (OTC), or as “sponsored units” (LVMUY) with five units to the share which are trading at $37 today.

The OTC market also has, generally, a negotiated transaction cost and the registration of the shares can be complicated; shares are registered with the company, which maintains its own trading desk; with certain banks; or as “bearer shares” which may be held by ourselves (in our safe, with our overcoat) or with an appointed financial intermediary.

Last year’s sales were about $37 billion, which is up from $30 billion the year before, but the cost of sales is high and only $9 billion, or 25%, survived before taxes. The current market value of the company is $94 billion and it will pay dividends of $2.4 billion to its shareholders for a current yield of 2.6%; there are 507 million common shares outstanding but the float is only half of that at 256 million shares.

The company is currently trading at $185 and above the price of risk, Risk Price (SF) of $170 and rising, and our estimate of the downside in the stock price due to the demonstrated volatility is minus ($10) per share but the stock price also tends to resist falling too far below the price of risk (please see Exhibit 1 below) with daily volumes in the 100’s of shares, and seldom in the thousands.

There is no options market for the stock so that we would be buying it at the market price of $185 with a stop/loss at $170 respecting the Risk Price of $170, and hoping that we can raise that price before anything bad happens; a stock price of $195 would not surprise us but it will take more buyers than sellers to do that and the fact that it’s trading above the risk price now is indicative of support for the stock by buyers who are risk averse and, based on the low volumes, may have bought the stock at much lower prices but are still unwilling to sell it at these prices.

Please see our recent Post, (B)(N) TKA ThyssenKrupp AG, for a similarly structured stock which has made some strategic errors in its plan for growth and to maintain its market (Reuters, August 24, 2013, EADS, ThyssenKrupp venture raided over suspected bribes in Greek order).

Exhibit 1: (B)(N) LVMH Moet Hennessy Louis Vuitton SA – Risk Price Chart

(B)(N) LVMH Moet Hennessy Louis Vuitton SA

(B)(N) LVMH Moet Hennessy Louis Vuitton SA

LVMH Moet Hennessy Louis Vuitton SA is a producer of luxury goods. Its businesses include wines & spirits, fashion & leather goods, perfumes & cosmetics, watches & jewelry, selective retailing and other activities.

(Please Click on the Chart to make it larger if required.)

From the Company: LVMH Moët Hennessy – Louis Vuitton SA engages in the manufacture and sale of luxury products. The company operates through Wines and Spirits, Fashion and Leather Goods, Perfumes and Cosmetics, Watches and Jewelry, and Selective Retailing business groups. Its wine and spirits product line comprises champagne, sparkling and still wines, cognac, and other spirits primarily under the Moët & Chandon, Dom Pérignon, Mercier, Veuve Clicquot, Ruinart, Krug, Château d’Yquem, Château Cheval Blanc, Hennessy, Glenmorangie, Ardbeg, Belvedere, 10 Cane, and Wenjun brand names. The company offers fashion and leather goods consisting of trunks, leather goods, ready-to-wear, shoes, watches, jewelry, accessories, sunglasses, and books principally under the Louis Vuitton, Céline, Fendi, Donna Karan, Marc Jacobs, Loewe, Kenzo, Givenchy, Thomas Pink, Pucci, and Berluti brand names. Its perfumes and cosmetics product line includes fragrances, make-up, and skincare products under the Parfums Christian Dior, Guerlain, Parfums Givenchy, Kenzo Parfums, Fendi Parfums, Make Up For Ever, Parfums Loewe, Fresh, and Acqua di Parma brand names. The company also offers watches and jewelry under the TAG Heuer, Hublot, Bulgari, Zenith, Montres Dior, De Beers, and Fred brand names. In addition, it operates retail stores under the brand names of DFS, Miami Cruiseline, Sephora, and Le Bon Marché Rive Gauche for travelers. As of December 31, 2012, the company operated 3,402 stores worldwide. In July 2013, it acquired majority stake of Loro Piana and the Hotel Saint-Barth Isle de France. LVMH Moët Hennessy – Louis Vuitton SA is based in Paris, France.


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