(News Bulletin 247) – LVMH, and the French groups as a whole, sit very well at the top of market capitalization. However, these companies are not the most expensive on the stock market when looking at valuation multiples.

Undeniably, luxury is one of the big winners on the stock market at the start of 2023. have seen strong growth recently. To give an idea, the Stoxx Europe Luxury 10 index wins nearly 25%

since the start of the year, nearly three times more than the Stoxx Europe 600, the benchmark pan-European index.

Which luxury groups, in this context, weigh the most on the stock market, and are the most expensive? These are two very different questions.

LVMH without competition on capitalization

In the first case, the answer is quite simple. Just look at the market capitalization, that is to say simply the total market value of the shares of the different groups. In this regard, LVMH, which passed the 400 billion euro mark in January and has just published a sparkling start to the year in terms of activity, has no rival. The group of Bernard Arnault, the richest man in the world, has a big head start (see graph 1) on his pursuers. Which are none other than L’Oréal and Hermès, which shows how much France dominates world luxury. It is thus necessary to go back to fourth place, with the Swiss Richemont, followed by the American Estée Lauder, to find non-French companies in the ranking.

It should be noted in passing that placing certain groups in luxury is subject to debate. Analysts often exclude cosmetics groups, such as L’Oréal and Estée Lauder, to classify them in consumer products. Which was not our choice for these infographics. Even Kering was not always considered a luxury group, especially when the company was called PPR and included the mail order company La Redoute and the clothing brand Puma, among its activities. On the other hand, analysts – and Qontigo, the company responsible for building pan-European indices – classify the optical group EssilorLuxottica, owner of the famous Ray-Ban brand as well as the manufacturer of corrective lenses Essilor, in luxury, as does the car manufacturer Ferrari. Admittedly, the culture of scarcity maintained by the prancing horse group, with only 13,000 vehicles sold in 2022, constitutes a strong argument for integrating it into the sector.

More generous multiples for “small groups”

Beyond the market capitalization, it is advisable to look at the multiples of valuation of a share to compare its degree of “expensiveness” with the others. No indicator is completely perfect in this respect, but we have chosen to take the simplest, ie the price/earnings ratio (P/E), in our second chart. This ratio assesses how many times the expected earnings trade for a given stock. The higher it is, the more “expensive” an action is in terms of its financial results.

Luxury has multiple flattering features on this point, which is explained by its growth and the quality of its results. On average, this ratio is around 30. To give an idea, that of TotalEnergies is at 8, and that of Stellantis at 5. Only the technological groups (Tesla is at more than 50, Apple at 27 ) really have a say.

So in terms of valuation multiples (P/E), French groups are not really expensive. LVMH is in the middle, or even a little below. Kering is even at the back of the pack. As explained in previous articles, the parent company of Gucci is currently at a discount, due to the artistic transition at the Italian label, which aims to give it a second breath, as well as the controversy over Balenciaga. The most “expensive” French share remains Hermès, which ranks fifth out of the twenty or so groups that we have chosen to include in our ranking, and third, if we exclude cosmetics and beauty products groups such as Estée Lauder, L’Oréal or Coty.

The highest multiples are observed on companies with rather low capitalization. The American Coty tops this second ranking, ahead of the Indian Titan Company, a watch and jewelry designer that is part of the Tata Group conglomerate. Next came the Italian Brunello Cucinelli, renowned for its cashmere products, Estée Lauder and Hermès, then the Italian Tod’s, known for its luxury moccasins and boots.

Small caps ahead

How do you explain that smaller companies are better valued?

Questioned by News Bulletin 247, the management company Monocle preferred to retain another multiple, that is to say the enterprise value in relation to the cash generated by the activity. “This makes it possible to take into account the debt and to look at a less polluted result”, she argues.

In the case of Coty and Tod’s, they “are companies with low margins because they are companies in crisis / restructuring (especially Coty which is struggling with its debt)”, underlines the management company. “So today’s bottom line doesn’t mean much to these companies, and therefore neither does the PE,” she adds.

Monocle calculated this multiple of enterprise value to cash for six companies. It arrives at a multiple of 18 for LVMH, 18 for Richemont, 25 for Tod’s, 35 for Hermès, 39 for Bruno Cucinelli, and 50 for Coty, based on the results of 2022.

“We notice that these multiples are higher for smaller companies,” she observes. The management company thus distinguishes Hermès and Brunello Cucinelli from LVMH and Richemont. The first two are “very good businesses, with high margins, and undoubtedly valued very expensively because the market thinks that a big player (LVMH or Kering) would pay very expensively for these assets”, observes Monocle.

On the contrary, therefore, large players who “have a size that prevents any idea of ​​​​repurchase, therefore the market values ​​​​a little less” these groups, despite the excellent fundamentals of these companies, adds the company.