Dec 5, 2019
U.S. tariffs won't harm French luxury firms' appeal
Dec 5, 2019
The U.S. threat of tariffs on French goods from handbags to Champagne proved just a glancing blow to giants like LVMH and Kering this week, as investors refused to give up their decade-long love affair with luxury goods.
The European luxury conglomerates are the leading lights of continental exchanges, just like digital behemoths Facebook, Amazon, Apple, Netlix and Alphabet's Google (FAANGs) are the vanguard of Wall Street stock indices and portfolios.
Equity analysts reckon the appeal of companies such as Hermes, whose Birkin handbags sell for $10,000-plus and often have waiting lists, will be undimmed despite attempts to hit their exports as retaliation for European taxation of U.S. digital companies.
With a price tag of over 200 billion euros, Louis Vuitton and Christian Dior owner LVMH is the biggest stock by market capitalization on the Paris exchange and is worth twice as much as pan-European planemaker Airbus which is also at the centre of the transatlantic trade war.
Last year, LVMH, which just spent over $16 billion snapping up U.S. jeweller Tiffany , generated 24% of its revenue in the U.S., but only about 6% of its operating profit would be exposed to tariffs on France, said Aneta Wynimko, a portfolio manager at Fidelity International.
"For me, these tariffs are manageable", said Claudia Panseri, an equity strategist at UBS Global Wealth Management.
"When I look into the total amount of sales generated by luxury goods in French I think the impact will be small".
LVMH's rival Kering, owner of Gucci and Yves Saint Laurent, has a smaller market capitalization of 68 billion euros, but that still makes it bigger than Paris-based BNP Paribas, which is the euro zone's biggest bank.
Kering and LVMH have seen their shares multiply over 6 times within 10 years, while the pan-European Euro STOXX has risen by two thirds.
In a nutshell, French luxury groups are to European equities what the FAANGs are to Wall Street.
Valuations for both groups make them expensive stocks. LVMH's 12-month forward price-to-earnings ratio is around 24, well above the pan-European STOXX 600 index's 14.7.
"It's deservedly, like the FAANG stocks, on a high price earnings multiple," said Jonathan Bell, chief investment officer at Stanhope Capital who says he has LVMH on his "buy list".
The U.S. threat to hit France with up to 100% tariffs on $2.4 billion of U.S. imports of products, including cosmetics and porcelain, did knock a few percentage points off share prices, but for Bell, the impact is likely to be temporary.
"In the long run I think most of the owners of LVMH are people that (are) a bit like Warren Buffet in Coca Cola, they buy it and own it for the long term."
The revenues of LVMH and Kering are much more aligned to the growing appetite for luxury brands from a new generation of Chinese shoppers rather than U.S. shoppers and Fidelity's Wynimko said high pricing power protects luxury brands.
"If someone has been waiting for the Birkin handbag for, I don't know, three years, and now the bag is available and it costs $500 more I doubt they are going to say 'no, I'm not going to buy it because of the tariffs'," said Fidelity's Wynimko.
LVMH, Kering and Hermes declined to comment for this story.
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