Bernard Arnault has never been as famous as Elon Musk until the former overtook the latter to become the richest man in the world.
He made it because he owns a big part of LVMH, the world’s largest luxury company by market cap.
LVMH is a fabulous business to own but it is currently overvalued.
However, we found another worthy luxury stock to buy at a discount.
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The company is Kering Group.
Although the portfolio is not as diverse and huge like LVMH’s, Kering owns valuable brands such as Gucci, Saint Laurent, Bottega Veneta and Balenciaga.
More importantly, Kering is undervalued now – the fair value range was between €686 and €879. Current share price is below the range.
Why is it undervalued compared to other luxury brands?
There are two possible reasons.
One is that the creative director of Gucci, Alessandro Michele, has stepped down after managing the brand since 2015.
Two is that Balenciaga had a PR-disaster due to an inappropriate ad – appeared to be BDSM on kids.
But we think these are temporary issues.
First you want the brand to be able to survive with different creative directors. It is not healthy or sustainable to stick to one for a long time. Brands outlast human lifespans. Hence, the succession has to come sooner or later.
Second is that fashion brands tend to push the curve and often get into inappropriate depictions. After a while people forget and move on.
There is an event that may help restore Kering’s share price – the lifting of travel restrictions in China – the Chinese can finally travel and may binge shop these luxury brands in Europe.
Relative to mass market or fast fashion brands, luxury brands are better for long-term investments.
This is because luxury brands have stood the test of time. In fact, the legacy is important. A new brand will find it hard to sell the concept of luxury because it doesn’t have a rich history nor has it earned the right to tell a story. The barrier to entry is high.
Mass market or fast fashion on the other hand can enter the industry with ease but peak out quickly. In fact, the younger generation doesn’t want to wear the same brand as the older generation. Ask Gen Z if they love Levi’s? Hence, mass market or fast fashion usually last one generation and not suitable for long-term investments.
Luxury is luxury, regardless of generation. These brands transcend generations.
Surveys have also showed that Gucci is one of the top luxury brands among Gen Y and Z. Balenciaga has been getting popular too.
Kering’s revenue growth has been at 12% per year in the last five years. This is many times faster than France’s GDP growth. More importantly the growth must sustain over long periods of time, which we have established that it could as luxury brands have longevity, and that the rising affluence of China plays a part in fueling the demand.
Kering is listed in Paris but it has an US Over-the-Counter (OTC) option.
Some may be concerned about the EUR exposure but these luxury brands take in revenue in major currencies around the world (38% in Asia ex-Japan, 27% in North America, 23% in Europe, 7% in the rest of the world and 6% in Japan.) Hence, the business is well diversified in forex.
Kering is also a consistent dividend grower. It managed to grow its dividend per share by 15% per year in the last 10 years.
It currently pays a dividend yield of 2.5% currently. Although not high but yield-on-cost improves as dividend per share grows. Assuming it continue to grow its dividend per share by 15% in the next ten years, your yield will increase to 10.1%. There is a dividend tax of 25% for foreigners though. But the capital gains will be the main driver of returns and not subjected to tax.
The share price has gained 347% in the last 10 years or about 16% per year.
In conclusion, Kering is a good long-term investment with a portfolio of strong luxury brands that have longevity and benefit from rising demand. The stock provides increasing dividends and offer attractive capital gains.
