LVMH – Love Me Harder

Topic: An investment in LVMH

Conclusion: Just say no


Until today, I’ve never looked twice at the LVMH share, but that’s about to change.

It’s now 5:55 p.m. Swedish time on Saturday, February 17, 2018 and I’m about to google the company for the first time, and form an opinion on its shares.

To be clear, it’s almost completely irrelevant whether LVMH makes telecom equipment or champagne and leather bags.

The two things that do matter are:

  1. What profits and cash flows LVMH can reasonably be expected to produce
  2. How much of those will be distributed to shareholders, and how the market will value those profits and cash flows (or otherwise decide on the share price)

Everything else is “assistance fluff” used to determine 1 and 2.

Don’t get me wrong though, it is important to know what business LVMH is in, in order to assess the company’s sustainability. What’s not important, however, is my view on the design or quality of their bags, the value for money I get from LVMH’s champagne or cognac, or attractiveness of their accessories, watches (did you notice my LVMH watch in the after ski picture above?), perfumes, cosmetics and… magazines (?).

Any single product or brand in this vast conglomerate is all but insignificant, no matter your subjective perception of its importance

But I trust you already understand as much.


By the way, it’s now already 6:05 p.m., so I’d better get started.


Valuation vs. financials and market position

My first observation is that with a market cap of 126bn EUR at a P/E ratio of 24.5 and a P/Book ratio of 4.3 they sure need to have a plausible plan for how to grow strongly and consistently for me to be interested. Alternatively, the numbers have to be fudged in some way (NB: fudging usually takes place in the opposite direction).

I have no interest in a deep dive in LVMH’s financial statements, so instead I just googled “LVMH financials” and found this on Reuters.

The 5-year sales growth has been 8.8%, and the 5-year EPS growth 8.3%. The numbers unfortunately are all over the place for other time periods, but 8.8% seems plausible as both a historical gauge and an estimate for the future. I mean, why wouldn’t a leading luxury goods house take some market share from the general economy, also known as customer “wallet share”, and thus grow a few points faster than average?

Another consideration is whether LVMH has a wide moat (sustainable competitive advantage) that warrants a higher than average long term growth forecast? Maybe, maybe not, but for now that’s probably the safest bet (that they do have an advantage that will allow for continued growth outperformance). My hunch is that consumers want to be mislead, and LVMH has a position and cash flow that permit outspending competitors in terms of marketing. Did you know that most of the advertising for luxury products is directed toward those who have already bought from the company – it’s there to alleviate post-purchase disappointment and cognitive dissonance.


Forecasting

The consensus forecast for 2019 is 12 EUR per share, which is +9% up from 2018, and the long term projected growth rate is 10%. I think that is a little too high, considering the 5-year historical average of less than 9% growth during a global stock market boom and immense central bank liquidity injections. I have nothing to add regarding the company’s historical numbers for leverage, margins, tax rates etc., other than that LVMH strikes me as a streamlined and efficient company – a mature category leader. The “mature” part makes me think I can simply extrapolate all numbers into the future. In real life forecasting is never that easy, but for now I’m painting this picture in broad strokes.

There’s just one thing that bothers me a bit: the ROE, Return On Equity, is “just” 17-18% for a P/Book of 4.3. That implies a required rate of return for investors of just 4% Sure, there is growth on top of that, and there is compound interest if you let the years pile up, but for every single year, the implied return for an investor is actually just 4% – unless the P/B valuation multiple increases over time. On the other hand the implied return is 4.4 per cent year two…


6:30 p.m. Here I had to take a short break for overseeing dinner, not to mention having a re-fill of champagne


Pros and cons with an investment in LVMH

There are upsides: great market position, proven growth model, proven investor interest in the stock, great cash conversion (cash flow is higher than profits), they already have a normal to high tax rate of 30 per cent, and a future proof product (vanity never dies).

But there are downsides too: a lowly 4% implied return on an equity investment, a P/CF of 17x and a P/E of 24x, not to mention the risk of an unprecedented era of easy money and widespread conspicuous consumption coming to an end.


TINA: There Are No Alternatives?

Sure, I get that in today’s low interest rate environment there aren’t many good alternatives, and a 4% real return, although with operational risk, is much better than 0% or negative real return.

Nevertheless, remember that the LVMH share has occasionally traded at much lover multiples in the past, and my best guess is they’ll do it again when the economic cycle turns. Actually, the LVMH share lost 50% in both of the most recent down cycles. I’m betting they’ll do even worse this time round. Notwithstanding that, I think the minimum return requirement for any equity investment should be 8-10%.

Please keep in mind that interest rates and inflation are cyclical phenomena and equity investments have extreme duration. Hence the current ZIRP/NIRP paradigm shouldn’t affect your tolerance for high multiples.

I know I’m getting out on a limb here. Some will say the growth rate of 9% should be added to the ROE for a total of 13% de facto ROE. I don’t agree, although there is of course some growth effect to consider. Anyway, I’m used to critique regarding my valuation methods. I still, e.g., remember the ridicule I faced when the Swedish retailer H&M traded at 350+ two years ago, and I said I wouldn’t touch it above 200 (it’s now at 135-140).

The LVMH case smacks of the same situation all over again. Although this is not a recommendation in any way, shape or form, I would hold off buying any LVMH shares above 150. Personally, I doubt I’ll buy any until it hits two digits at 99 EUR/share. Why not check at my P/E=1 idea in this post instead?

Cheers (6:50 p.m., I spent almost an hour on this! I hope you’re happy!!)

Gold, God, Quantum physics – are you buying this?

INTRO Per Gessle, the Swede who composed the song “It Must Have Been Love” that was featured in the Julia Roberts movie “Pretty Woman” has said that he only writes when he’s inspired. I’m mostly like that too, all other comparisons aside. This post formed in my head over the course of less than a minute, not unlike this one on The Meaning Of Life.

THEME Contemplating and discussing the true nature of reality over the last six months seem to have led to me being hit by and interacting with a stray inspiraton* five minutes ago, incidentally right after re-watching the amazingly entertaining movie “The Wolf Of Wall Street” during a long and late Saturday brunch.

* a very rare elementary particle

CONCLUSION Cutting straight to the chase, my conclusion is that what matters on the stock market is how consistently and predictably you can earn “money” that can be used for manipulating reality into subjective experiences with certain desired properties (I hint at what those properties might be in my Perspectives article series. Start here).

IN SHORT: DO WHAT WORKS, and take a good hard look at Gran Colombia Gold Corp


This morning Mike Cernovich referenced a quantum physics article in Scientific American that discussed a new slant on how to interpret the problems of wave collapse, observer dependency, matter duality and more. It got me thinking. By the way, if you’re interested, here is my immediate reaction to the article:

 


God and reality

Winter came, and with it late night discussions about the existence and nature of God. Yes, “God”, as in some kind of power or presence outside the laws of nature, or as the very laws of nature (whatever that’s supposed to mean; I mean are they laws, or aren’t they).

For me the word “God” is too tainted by culture and tradition to possibly serve as the basis of an open minded conversation about existence. As much as I try to suppress images of a potent and aware entity, and replace them with “anything or everything” or “purpose” or some other temporary placeholder, I keep failing.

In parallel with discussing the God delusion we have talked at lenght about reality, not least whether it’s objective or not, i.e., whether reality exists or not.*

(* I’ll just add here that reality does exist. This, here that we experience is reality. In my view, that holds water whether reality actually exists or not, since I think the word ‘reality’ is defined as “this, here” that I experience and I have good reason to assume you experience too)


Solipsism and pragmatism

The conversations have ranged from pure solipsism* to self-referential unusable tautologies such as “the universe is the universe”, “God is all and all is God”, “purpose is the purpose”, and much more.

(* solipsism = I am the only thing that exists and everything else is just a dream – quite a complex dream with billions of dreamed up personalities, trillions of other seemingly independent living things, quadrillions of celestial bodies scattered over trillions of cube light years, evolving over billions of years, including Darwinistic trajectories and thousands av brilliant scientists climbing atop each others’ shoulders to scout ever further. Imagine all that in just one entity, i.e., me, not to mention I have forgotten it all and am lost in my thoughts slowly rediscovering minuscule fractions of it all before imagining dying)

I am a practical person. And, as much as I’m a fan of basic research, understanding that we can’t know when and for what that knowledge might come in handy, pure philosophical word play that doesn’t even aim for practical use, but rather aims for self-containment and non-practicality quickly loses its appeal to me.

By the way, if this post triggers a strong need in you to explain to me all the ways I have misunderstood solipsism or any other branch of philosophy, or quantum physics for that matter, please don’t. This article is not about that at all. Quite the opposite. It’s about doing what works.


The universe is all mental

The quantum physics article Mike linked to builds up to an idea about thoughts being the ultimate building blocks of nature, perhaps a little like the illusive inspiratons I jokingly mentioned above.

These ubiquitous “thoughts”, which I assume are pretty dissimilar from the everyday brain thoughts with which we humans are familiar, interfere with each other as well as with organical thoughts; thus giving rise to the physical reality.

With “thoughts” everywhere, from the empty voids of space to the cores of stars and brains of humans I’m guessing brains acts as a kind of amplifying antenna that can focus inanimate thoughts into living thoughts.

Alright, as much as I try to keep an open mind – on a theory stating that brains and thoughts are not the product of billions of years of evolution, pattern recognition and survival of the most adaptable – trying to comprehend a theory of substrate-free “thoughts” as the ultimate building block is just as difficult as stripping the word “God” of all its religious baggage.


Please explain

Why “thoughts”, I ask? Why not just super strings? They are equally mystical, ethereal, versatile and infalsifiable. Whether you decide to build a world view with turtles all the way down, hyperdimensional strings, gods behind gods in Russian dolls, or thoughts all the way down, doesn’t really matter. You’re still not explaining anything. And you’re not adding anything to the toolbox of improving your own subjective experience (except for the fun it might be to play a meaningless game for a while).


Experience, prediction, manipulation

For me, my experience is all that matters. My reality is my reality, but it’d better be pretty well attuned to the more or less predictable laws of nature for my subjective experience to be sustainably pleasurable.

Experience is all, since non-experience is non-experience. Per definition.

If you want to define these words any differently, be my guest, but I won’t understand you. Hint: if you want to be understood, strive to use unambigous words that people (can) understand.


What interests me are reliable predictions in as much as they allow me to manipulate and control my experiences.

The actual and ultimate truth might be something altogether different and incomprehensible. But that doesn’t matter to me. What matters to me is what I (can) experience.

I can’t remember anything before my birth, and there are no believable recounts of post-death experiences. This, here, this stream of consciousness began some time around the birth of this body, and it seems destined to end with this body (not yet fully counting on uploading or immortality).

So, I can experience what I can experience, and that is what appears to be a physical world of things, including electrochemical patterns in brains. Humans now understand a great deal of what can and does affect us (cause experiences), and of what can be manipulated by us. That’s just another way of saying science has laid out a pretty good map of reliable laws of nature; laws that I consider when making decisions I hope will lead to as meaningful a life as possible.

That which might “exist” but can’t be manipulated or affect us is simply irrelevant. Per definition. The world may be a dream, or nothing at all. Maybe I’m alone, maybe not. Maybe I’m a simulation… Maybe there is a “God”, even though it has left no trace of its existence since the Big Bang.

In any case, my actual personal experiences are more or less limited to sleep, food, love and a few other “experiences”. My aim is to optimize those over the course of my life, by designing as solid and consistent a foundation of predictions and manipulations as I can.


Pragmatism and investing

And, that is also exactly how I would, in the best of worlds, go about my investments. I don’t care whether the world ‘really’ exists (though it should be clear by now, that to me “exists” means whatever this experience is. Per definition), or if a country’s or company’s operational fundamentals exist objectively. I don’t care if “valutions” are real or not.

What I do care about is how to predictably and as consistently as possible make decisions that enhances my potential for manipulating reality into better subjective experiences. That might include maximizing dollar amounts on the stock exchange, or units of gold, or analysing historical metrics patterns. In doing so, I like to rely on consistent laws of nature, rather than fickle gods and “it’s all a dream” fantasies.

What matters isn’t if valuations, profits, money or even the universe is real. What matters is how I feel about it, and not least what I can do to improve on that situation.

P.S: Please, let’s keep “free will” out of today’s discussion.


Gran Colombia Gold Corp

-when did you last see a Price Earnings ratio of 1?

By the way, have you seen this Price/Earnings = 1 company in Canada? Gran Colombia Gold Corp. Disclaimer: this is not an investment recommendation and any losses incurred are your own. In addition, PER=1 might be significantly misleading due to dilution, but I’ll leave that to you. I personally, however, would be surprised if the stock didn’t reach 6 dollars per share by the end of 2018.

Se upp med förenklande och fördunklande etiketter

OM du gör bättre investeringar genom att kategorisera bolag som “fina” så fortsätt med det. Allt som fungerar på aktiemarknaden skall uppmuntras, för det finns så mycket som inte fungerar.

Personligen har jag dock inte lyckats sätta en motiverad värderingspremie baserad på om ett bolag är “fint” eller inte.


Ämne: Den intressanta verkligheten bakom uttrycket “fint bolag”

Slutsats: Det dunkelt sagda är det dunkelt tänkta

Relaterat: på tal om farliga etiketter så pratar Ola Ahlvarsson den här veckan om att inte begränsa sig pga för smal beskrivning av vem man är och vad man gör (avsnittet är 34 minuter)


I den här artikeln kommer jag förklara varför jag tycker att uttrycket “fint bolag” är så fascinerande, och förhoppningsvis förmedla hur det kan leda till sämre investeringsresultat för den som använder sig av det.

“Fint? Vad betyder det?!”


Världens bästa investerare och wonderful companies

Charlie Munger och Warren Buffett brukar säga att det är bättre att köpa ett fint bolag till rimligt pris än ett ok bolag jättebilligt. Det har gått oerhört bra för Munger och Buffett.

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”

Men, glöm inte bort att Howard Marks som är nästan lika framgångsrik har sagt att det är priset som är absolut avgörande för avkastningen. Marks säger att det finns ingen tillgång som är så dålig att investeringen inte kan bli bra om priset är tillräckligt lågt.

Citaten från Marks, Munger och Buffett är emellertid irrelevanta för dagens ämne utom på ett sätt: Det är lika dumt att investera enbart baserat på ett uttryck som “fint bolag” som huruvida priset är “lågt” eller om företaget är “wonderful” eller “fair”. Man gör sig skyldig till precis samma misstag av endimensionalitet och icke-analys.

Dessutom, Munger stannar förstås inte vid att kategorisera bolag som “wonderful” eller “fair”, eller att värderingarna bara delas in i två lika vaga kategorier. Han och Buffett har förstås en gedigen checklista som avgör om ett bolag uppfyller kriterierna för en långsiktigt högavkastande investering jämfört med alternativen.

Att de har som övergripande vägledning att hellre köpa dyrt och bra än billigt och dåligt betyder förstås inte att analysen stannar där. Inte ens ett riktigt bra företag med bra ledning är värt hur mycket som helst. Det förstår Munger också. Gör du?


Det farliga med “fina” bolag

Så här gör man (till exempel) när man tjänar pengar på aktier:

  • Köp en aktie baserat på analys av historiska kursrörelser och sälj den dyrare till någon annan
  • Köp en aktie baserat på analys av bolagets intjänings- och utdelningsförmåga och vänta på utdelningarna
  • Köp en aktie som värderas lägre än motiverat av bolagets intjäningsförmåga och sälj den när marknaden justerat för den tillfälliga felvärderingen

En del lägger till en fjärde punkt: Köp ett bolag som är “fint” och behåll det oavsett vad som händer med kurs eller verksamhet så länge det fortfarande är “fint”. Sälj bolaget när det inte längre är “fint”, förhoppningsvis till någon annan som fortfarande tycker att det är “fint”

Jag förstår att beskrivningen “fint” mycket väl kan användas som förkortning för “rimligt eller lågt värderat i förhållande till bolagets förutsättningar att skapa vinst och kassaflöde“, eller kanske “som har kompetent ledning, kompetent personal, tekniskt försprång skyddat av patent, hög och stabil marknadsandel tack vare bra produkter, låga enhetskostnader och nöjda kunder” och liknande positiva, mer eller mindre precisa, beskrivningar. Men, det finns en uppenbar risk att man lurar sig själv om man inte regelbundet uppdaterar bilden av bolaget och påminner sig själv om sin definition av genvägsbegreppet.

Tanke: Warren Buffett kanske skulle säga att om företaget har en “vallgrav” (moat) av skydd mot konkurrenter så är det ett fint bolag, men vad vet jag om hur han tänker?


Etiketter formar verkligheten och ditt beteende

När du sätter en etikett på något så låser du din uppfattning om saken. Det gäller både när du säger saker om dig själv som “jag är ekonom”, “jag kan inte sjunga” och när du kategoriserar andra eller andra saker. Vad betyder t.ex. “Emerging Markets” och är alla EM likadana? Vad betyder “tight oil”, “unconventional oil” eller “oljelager” (vilket lager, vilken slags olja, vilken årstid, under vilka omständigheter)?

Etiketter och fördomar är ibland användbara genvägar, det är därför evolutionen tagit fram dem. Men, på börsen och i många andra moderna sammanhang utgör de s.k. evolutionära mismatches.

Om någon (någon annan eller en tidigare version av dig själv) gjort en gedigen analys av ett företag och år efter år kommit fram till att bolaget outperformar på en rad punkter (tillväxt, resultat, kassaflöde, renommé, anställda) så förstår jag om man inte orkar redovisa allt detta utan börjar kalla bolaget “fint” eller “kvalitativt” eller “det finns en mängd punkter över lång tid som motiverar 30% högre multiplar än liknande företag eftersom det pålitligt vuxit ifatt värderingen på 2 år gång på gång”. OK, kalla det “fint” för att du tröttnat på at förklara för oinsatta varför du äger en skenbart dyr aktie.

Men, om du bara hört någon annan kalla det “fint”, hur ska du då veta vilken premie som är motiverad?

Eller, om du slutar analysera detaljerna (förståeligt om resultatet varit detsamma år efter år) och nöjer dig med att tänka att “äh, det är ju ett fint bolag, varför skåda hästen i munnen“, då kan bolaget eller dess förutsättningar ha förändrats.

Det är denna lättja jag vill varna för när man använder vaga etiketter. Vilket P/E-tal ska ett “fint” bolag ha? Och ett fult då?

Så länge etiketten fungerar för dig och du vet precis vad den står för ska du förstås använda den. Det är effektivt – slösa inte tid på att övertyga andra om du inte måste för att din strategi ska fungera.

Men tänk på att när det pratande huvudet på TV säger “det är ett fint bolag” så har du ingen aning om vad just det huvudet menar. Dessutom tycker jag att det påfallande ofta gäller fallna änglar, dvs bolag som t.ex. Hennes & Mauritz som överpresterat historiskt men sedan väldokumenterat tappat mark. Man vill så gärna att aktien och ens pengar ska komma tillbaka, så man hänger upp sig på att det ju brukade gå bra och därför struntar i märkliga lageruppbyggnader, fallande marginaler. vilseledande information med mera.


Vad som än får din båt att flyta

“Fina bolag”-etiketten fungerar i alla fall inte för mig. Det är för oprecist. Jag kan inte använda det vare sig för prognoser om bolaget och dess finansiella data eller värdering av bolagets prestationer.

Däremot kan jag också i en snabbpitch säga saker som “de har ett teknologiskt försprång och ett genomtänkt affärsmannaskap som sannolikt gör att tillväxten fortsätter vara högre än branschsnittet samtidigt som lönsamheten är högre. Skalfördelar och en från grunden genomtänkt produktion och distribution gör att företaget sannolikt fortsätter att utöka sitt försprång“, dvs jag säger typ “fint bolag och kan därför värderas högre”.

Alla orkar inte alltid vara precisa utåt. Det viktiga är att vara precis där det gäller – i ditt faktiska beslutsfattande.

Så, om du inte är helt säker på att användning av termen “fint bolag” gör dina aktieaffärer säkrare eller mer högavkastande, så var vaksam och gå igenom fakta en gång extra.