One of the reasons the Paris stock market was rated as more valuable than London’s in a recent Bloomberg survey was the strength of its fashion sector. It features some of the giants in the industry, and with investors now hopeful that China will start to drop its zero Covid policy, big fashion companies with exposure in Asia are being bid up.
Two of the biggest are LVMH and Kering. The latter company is probably better known for some its major brands, like Gucci, Saint Laurent, Balenciaga and Alexander McQueen. But if you have the cash for only one, which do you go with?
Both companies are competing in a tough sector. Currently they are all rated a Hold by Deshe Analytics. Benchmarking LVMH against its peers we find it just outperforming in most metrics; where it falls down slightly is with its cash flow. Here it is underperforming the likes of Hermes and Darmatex.
“We do believe, though, that macro-related market conditions will influence [LVMH’s] performance more significantly than its individual results,” Deshe said in its most recent report on LVMH. “We therefore gave LVMH a total score of 69 out of 100 and a HOLD recommendation.”
LVMH reported earnings results for the half year ended June 30, 2022. For the half year, the company reported sales was EUR 36,729 million compared to EUR 28,665 million a year ago. Net income was EUR 6,532 million compared to EUR 5,300 million a year ago. It scores well in terms of its price to book (76%) and return on equity (78%) ratios. While total revenues are up, it is not by much. The company remains the dominant market leader among French fashion stocks with a market cap in excess of EUR 369bn.
In terms of stock price performance, LVMH is now priced above its 5-day, 50-day, and 200-day moving averages, while its MACD (moving average convergence divergence) indicates that the stock’s price movement momentum is strengthening. Historically, this is a positive setup in the near, medium, and long-term. In particular, many institutional investors keep close watch of the 200-day moving average. The company is trading near it’s 12-month high, which signals an attack on the resistance price. We have been seeing some excellent momentum in the stock since September. But it IS close to that ATH, and as Deshe says, this has to be a factor for investors with the prospect of a global recession, even if Chinese shoppers step out more frequently.
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So what about Kering shares then?
Fancy a bit of Balenciaga instead? Kering has been grabbing headlines as it has pursued Tom Ford, which would be a major feather in its cap. Deshe scores it a 68, just below LVMMH, which is significant. Kering may need Tom Ford more than it admits, as its last set of results was…mediocre. It has reduced liabilities, the return on equity is up 7.7% which is good to see, but the price to book was down 13.9% on the last set of numbers. The PE ratio is 19.1. That compares with 28. for LVMH stock (24.2 at filing date).
Kering is a smaller company than LVMH, with a nearly EUR 70bn market cap. It underperforms against its bigger cousin in terms of balance sheet. Deshe says the technicals still look interesting, however. Based on the stochastic oscillator, the shares look a tad oversold.
The two are too close to call in terms of overall metrics, but we’d note that the Kering stock price is well off its 52-week high. We had a near term rally in August which touched EUR 562. At time of writing the shares are around the EUR 564 mark. We’d agree with Deshe here that the shares look oversold.
Kering is cleaning house as I write this. The company just sacked the Gucci creative director Alessandro Michele. This is a big move because Gucci represents two thirds of Kering’s annual operating profit. Analysts feel Kering has been growing less quickly than some of its competitors in the space. Investors in France have been leaning hard on the board to make some changes, and soon.
A number of factors could be behind the issues with Gucci – fewer shows post-Covid and ‘designer fatigue’ have both been cited as complaints in the Paris salons. Citigroup sees the nomination of a new designer at Gucci as the potential catalyst for a turnaround in Kering’s fortunes. If anything, the company still feels like it is labouring under a Covid hangover while its competitors streak ahead. Brand fatigue can also be a big factor in the fashion game.
LVMH simply looks too expensive, too over-priced for us. Kering has many of the same metrics, but the difference here is that it looks underpriced for what it is. If Kering can make the right call on Gucci, investors should see some good upside over the next 3-6 months.