LVMH: King of the Luxury Jungle

SEPTEMBER 2009
Profit from temporary W&S woes to bag the stock at discount prices

LVMH is the strongest player in the luxury goods industry, a giant in an industry where fixed costs make scale paramount; the only "two-legged" balanced player, leading with mega-brands in both Leather Goods and Wines & Spirits; enjoying stable group EBIT margins as a consequence
Champagne consumer demand weakness, de-stocking and oversupply in 2010 are well understood;
W&S concerns have depressed the stock close to 20-year trough multiples and in the same range of smaller and more volatile hard luxury players and other peers; an opportunity in our view
On top of LVMH's unrivaled industry position, markets seem to under-appreciate cost-saving opportunities, brand-portfolio rationalization, higher FCF from lower W&S inventory investment, above-average mega-brands' results or support from first-mover EM inroads
In a medium-term growth environment, LVMH has the chance to be a key consolidator in the luxury goods industry: a mega-merger with CFR would be a strategic master stroke, placing it ahead of any M&A counter move by competitors

SEE DISCLOSURE APPENDIX OF THIS REPORT FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

LVMH: KING OF THE LUXURY JUNGLE

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Portfolio Manager's Summary
We have few doubts about the opportunity of investing in LVMH for the medium to long term. We expect "winners will continue to win" in the luxury industry. LVMH with its material scale advantage, leading brand portfolio, balanced category and geographic exposure is set to dominate over competitors in the long term.
LVMH's mega-brands and scale advantage is particularly relevant in fashion and leather goods. We expect this area to continue to provide material top-line and earnings growth. In fact: (1) mega-brands like Louis Vuitton secure