Europe's luxury stocks have room to rise, but becoming costly
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[January 31, 2023] By
Lucy Raitano
LONDON (Reuters) - Europe's glittering luxury companies, the region's
top stock-market performers in 2023, may see yet more gains driven by a
rebound in Chinese spending, but for some the sector is starting to look
expensive.
The likes of French luxury giant and Louis Vuitton-owner LVMH, and Swiss
jewelry company Richemont, have benefited from the resilience of their
wealthy customers against the cost-of-living crisis.
Since the start of 2023, China's decision to allow more normal activity
and dismantle its strict COVID-19 restrictions has provided another
boost for the sector.
An index of European luxury goods retailers has rallied around 18% so
far this year, outperforming the wider pan-European STOXX 600, which is
up 6.2% in the same time frame.
But the fact that luxury goods companies are not as cheap as they once
were is a "concern/point of attention", said Kasper Elmgreen, Head of
Equities at Amundi, Europe's largest asset manager.
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"They’re much more fairly valued today, there is less that is perhaps
undiscovered. The risk is that when something moves to being priced to
perfection there is always a higher risk of disappointment."
The price-to-earnings ratio of the MSCI Europe luxury index is around
26, while that of the broader STOXX is closer to 13, according to
Refinitiv data.
European luxury has historically traded at a big premium relative to the
broader market, but this has widened even further in recent years. At 23
times 12-month forward earnings, its current premium of 82% is almost
twice as much as the 20-year average, according to Refintiv Datastream.
THE APPLE OF EUROPE'S EYE
LVMH, Europe's most valuable company by market capitalisation, has a PE
ratio of around 30, while rival Hermes has a valuation of almost 60,
according to Refinitiv data. Apple, the world's most valuable company,
commands a PE ratio of around 23.
Jelena Sokolova, senior equity analyst at Morningstar, said that China
reopening is the key issue for European luxury stocks this year, and is
already at least 50% priced in.
"Currently we don’t see this sector as undervalued anymore ... there
were some opportunities last year, but they are fairly valued now, or a
little too overvalued at the moment,” she said.
In a January research note, UBS analysts said 2023 was "the year of the
Chinese consumer for European luxury”, and highlighted Richemont, Hermes
and Italian luxury group Moncler as their top picks and "the most
balanced, high-quality plays on China re-opening".
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![](../images/013123PIX/busine36.jpg)
Women with shopping bags branded with
Louis Vuitton walk outside the department store Kaufhaus des Westens
"KaDeWe" in Berlin, Germany November 16, 2022. REUTERS/Lisi Niesner/Files
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Ongoing concerns of recession, an expected fall in earnings
expectations, and sky-high inflation mean the potential returns on
luxury stocks could be a boon in what promises to be a difficult
year for stock-pickers.
The ability to increase the price of products without losing
customers has stood out as a key strength of Europe's luxury brands,
and remains in focus for equity investors even as inflation on the
continent eased in December.
"The things they sell don’t really depend on the price that they
charge, with the average price of a product at Cartier of $10,000
whether it increases to $11,000 is neither here nor there," said
Nick Clay, head of global equity income at investment manager
Redwheel.
These shares have more room to run higher as Chinese consumers hit
the shops again and luxury companies flex their pricing power. But
with valuations already fairly lofty, investors question how much
higher they can go.
LVMH's most recent earnings showed a 9% rise in organic sales in the
fourth quarter as shoppers in Europe and the United States splurged
over the holiday season, helping partly to offset COVID-19
disruptions in China.
But some analysts focused on the margins, taking some of the shine
off the fourth-quarter sales boost. That said, it had little impact
on the share price, which has risen by 600% in the last 10 years,
compared with a 91% gain in the benchmark STOXX.
"Companies like LVMH have high quality businesses, they compound
profits over long periods of time and deliver great returns for
shareholders," said Mark Denham, head of European equities at French
asset manager Carmignac.
"It is true that the ratings of these companies have risen so it
becomes slightly more asymmetric, but over the long term earnings
compounding is the dominant factor.”
(Reporting by Lucy Raitano and Danilo Masoni; Editing by Amanda
Cooper and Sharon Singleton)
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