VALUATION OF LVMH

Valuation of LVMH Moet Hennessy Louis Vuitton (LVMH)

Valuation of LVMH Moet Hennessy Louis Vuitton (LVMH

VALUATION:

€135.20

(€130.20-€142.01)

RECOMMEND:

HOLD

Contents

Company Overview

Methodology for Stock Valuation

Business Description and Target markets

Overview of Financial Performance in the Year 2012

Financial Position

Market Performance Analysis

Current Stock Analysis of LVMH

Impact of Uncertain European Economy

Future Prospects of the Company

Investment Decision

Conclusion

One Month Price Share Movement

Company Overview

Formed in 1987, as a merger of Moët Hennessy and fashion house Louis Vuitton, the company is well known as a multinational luxury goods seller (Financial Times, 2013, p. n.d.). LVMH Moët Hennessy Louis Vuitton is a leading player of the French accessories and apparel industry with market capitalization of €62,610.45 million (Bloomberg, 2013, p. n.d.).

The company has employed 106, 350 employees, who are the key competence of the diversified business (Financial Times, 2013, p. n.d.). In the last four weeks, company's stock has been showing mixed trend that indicates the investor enthusiasm to learn about future prospects and potential of the company (Financial Times, 2013, p. n.d.).

Figure 1: LVMH's Market Performance as of April 19, 2013 (Financial Times, 2013, p. n.d.)

Internal comparison of the company's past four semi-annual revenues and net income shows that the year 2012 has ended up with a weak financial business performance (Bloomberg, 2013, p. n.d.).

Figure 2: Trend Analysis of Financial Performance (Bloomberg, 2013, p. n.d.)

Methodology for Stock Valuation

There are two broad approaches to stock valuation. One is the ratio-based approach and the other is the intrinsic value approach. We will be looking at both of these in more detail later, focusing on the intrinsic value approach that we tend to favor at Morningstar. But here's a brief overview to get you oriented. If you have ever talked about a P/E ratio, you've valued a stock using the ratio-based approach. Valuation ratios compare the company's market value with some financial aspect of its performance--earnings, sales, book value, cash flow, and so on. The ratio-based approach is the most commonly used method for valuing stocks, because ratios are easy to calculate and readily available.

The downside is that making sense of valuation ratios requires quite a bit of context. A P/E ratio of 15 does not mean a whole lot unless you also know the P/E of the market as a whole, the P/Es of the company's main competitors, the company's historical P/Es, and similar information. A ratio that looks sky-high for one company might seem quite reasonable for another.

The other major approach to valuation tries to estimate what a stock should intrinsically be worth. A stock's intrinsic value is based on projecting the company's future cash flows along with other factors, which we'll discuss in Lessons 403 and 404. You can compare this intrinsic or fair value with a stock's market price to determine whether the stock looks underpriced, fairly valued, or overpriced.

Business Description and Target markets

At present, the company has divided its business activities into five groups of business functions including perfumes and cosmetics, selective retailing, fashion and leather goods, watches and jewelry and wines and spirits (LVMH, 2012, ...