EUR 850.00 For Business Accounts Only

Morningstar | LVMH's 3Q Sales Show Slight Deceleration; Shares Still Moderately Overvalued After Sell-Off

We are maintaining our fair value estimate of EUR 231 per share for wide-moat LVMH after the company reported third-quarter sales broadly in line with our full-year expectations. All divisions displayed solid growth in the quarter, albeit decelerating slightly from the first half of the year. Although results look solid and the market's anticipated slowdown in Chinese spending has yet to materially manifest itself, we believe investors are growing wary of the luxury sector’s elevated valuations, prompting a sell-off. The shares are still trading at a moderate premium to our fair value estimate even after a 7% decline at the time of writing.

The wines and spirits division's organic growth for the third quarter stood at 7%, in line with the first half of the year. The fashion and leather goods division, the most important in terms of profits, increased 14% organically in the third quarter, a slight deceleration from 15% organic growth in the first half of the year. The perfumes and cosmetics division increased 11% organically versus 16% in the first half. The watches and jewelry division decelerated to 10% organic growth from 16% in the first half and selective distribution slowed to 5% from 9% in the first half.

Chinese buying remained buoyant in the quarter but slowed sequentially to growth in the midteens, versus high teens in the first half of the year. Chinese domestic spending was slightly stronger at the expense of foreign purchases. Although Chinese luxury buying so far remains resilient despite poor stock market performance and currency weakening, management pointed to potential higher cyclicality of this consumer demand, given the higher proportion of luxury in relation to income compared with other nationalities.

Japanese buying also slowed to more normal mid- to high-single-digit growth in the third quarter compared with midteens growth in the beginning of the year. The watches and jewelry division was affected by a tough comparison base and a tougher competitive environment in the United States for Tag Heuer and wholesale cleanup activities at Bulgari. Normalization from exceptionally strong growth in Hong Kong in the first half of 2018 for DFS led to more moderate growth in the quarter.