About the "solidarity tax": of course, it was not temporary. But before Macron's presidency, the corporate tax was 33%. Today it is 25%. Therefore, the solidarity tax is an issue, but French corporations are used to high taxes...
Thanks for your thoughts. I share similar thoughts, having first bought shares this year and added recently.
In my base case however, I have revenue at 10%. They plan to open 1 new workshop a year (circa 4% growth from 25 workshops in 2025), but also expand footprint and hiring at current workshops so say 5-6% from volume alone, and can increases prices nicely above inflation which is 3-4% currently, I used 4.5%. This is same as their 1980-2010 price CAGR, but now we have sticky inflation and tighter demand > supply relationship for the Holy Trinity bags than before.
Combined volume and pricing power I get 10% base case. 15% Bull case (they managed 20% average last 5 years) if they push pricing power and inflation is higher.
Also because of this pricing power above inflation, operating margin naturally increases over time as costs across the company grow slightly slower than price increases per item. Gross margin long term have trended up, showing this is the case over time, and operating margins have grown slightly faster. I think using 42% for base case is too conservative in my opinion, that's against the long term consistent trend of the company because of this pricing power dynamic.
I've used 47.5% by 2035. Similar multiples, if not a tad higher. 15% base case for me combined with one the strongest moats, which can't be disrupted in any way by A.I, a strong buy for myself.
Nice analysis. I agree with a lot of it, but with a few caveats.
The 20% average over the last 5 years is correct mathematically, but 2021 was a rebound year after COVID, which skewed the numbers. Their actual constant-currency growth was 42%, 23%, 21%, 15% and 8.9% from 2021–25, and once 2021 goes out of the rolling 5-year period, the average would be much lower.
Also, the margin has stayed around 40-42% since 2021, which makes your base case of 47.5% by 2035 a bit too optimistic.
Having said that, I still think it's a good business to buy at current prices, but I'd call it around fair value rather than cheap. I have a starter position and plan to add more on any further downside.
The 2021 year was a rebound, but from 2019 to 2021 which smooths out this rebound they still grew 14% CAGR. So 2019 to 2024 say was above 15%, without the rebound effect.
As the growth was rapid in 2021 and 2022, the normal operating leverage has been offset in my opinion has this growth has slowed down and they spend some of the cash from this high profit cylical peak to expand cost basis. The period 2012-2019 also was range bound 32-34% operating margins, but now has jumped up nicely. It may not be smooth operating leverage, but as long as they continue increasing prices above inflation of their cost base, they will show operating leverage. Looking out further over any 10 year rolling period starting 2006, they have made strong progress with operating leverage of 5-6% points.
Keeping it at the current levels, espically when the past 2 years have had negative currency affects where lots of their costs in Euro's, is too conservative for me as a base case.
Fair points, thanks. I only looked at the margin over the last five years, and you're right that it has moved up in steps rather than smoothly, so another step up isn't unrealistic.
I'm still a bit hesitant because the last big jump came with the very fast growth of 2021. Getting to 47.5% needs another jump of that size while growth is running closer to 6%, so I'd want to see price rises clearly running ahead of costs first. The full-year results in February should give a better read on that.
Yep. Either way, doesn’t too dramatically change things when going from 42% to 47% vs say 21% to 27%, relative wise change in OpPr.
My bigger worries are the brand strength, The Game that people have to play now and puts some % off, which potentially could damage them longer term, although Ferrari also sort of has this and buying a Rolex also, so many examples where it hasn’t put people off as in some ways makes in more exclusive and the wait for the item makes some desire it more once they achieve it.
China economy stablising eventually also watching, as well as measures they are/may take against the wealthiest Chinese
Leather goods makes the base case look reasonable to me. It grew 10.2% at constant currency in Q2 against about 7% for the group, and that’s the part limited by how fast Hermès can train artisans.
Hermès is about the closest thing to a bond with pricing power in luxury, which is exactly why it almost never gets cheap. I own the space through LVMH, bought into the cyclical weakness, and the lesson I keep relearning is that with franchises this rare the real mistake is waiting for a valuation quality like that rarely gives you. Where would you actually want to add?
Dal punto di vista grafico non ci sono segnali di inversione del titolo. Il mercato rimane molto negativo e il prossimo supporto è a 1118 quindi anche molto lontano.
Nice post sir, fully agree with the analysis. Very high quality company at a decent valuation.
If youre happy with a 12-15% cagr, and most should be, this is a nice pick around these levels
About the "solidarity tax": of course, it was not temporary. But before Macron's presidency, the corporate tax was 33%. Today it is 25%. Therefore, the solidarity tax is an issue, but French corporations are used to high taxes...
Very good point
Thanks for your thoughts. I share similar thoughts, having first bought shares this year and added recently.
In my base case however, I have revenue at 10%. They plan to open 1 new workshop a year (circa 4% growth from 25 workshops in 2025), but also expand footprint and hiring at current workshops so say 5-6% from volume alone, and can increases prices nicely above inflation which is 3-4% currently, I used 4.5%. This is same as their 1980-2010 price CAGR, but now we have sticky inflation and tighter demand > supply relationship for the Holy Trinity bags than before.
Combined volume and pricing power I get 10% base case. 15% Bull case (they managed 20% average last 5 years) if they push pricing power and inflation is higher.
Also because of this pricing power above inflation, operating margin naturally increases over time as costs across the company grow slightly slower than price increases per item. Gross margin long term have trended up, showing this is the case over time, and operating margins have grown slightly faster. I think using 42% for base case is too conservative in my opinion, that's against the long term consistent trend of the company because of this pricing power dynamic.
I've used 47.5% by 2035. Similar multiples, if not a tad higher. 15% base case for me combined with one the strongest moats, which can't be disrupted in any way by A.I, a strong buy for myself.
Nice analysis. I agree with a lot of it, but with a few caveats.
The 20% average over the last 5 years is correct mathematically, but 2021 was a rebound year after COVID, which skewed the numbers. Their actual constant-currency growth was 42%, 23%, 21%, 15% and 8.9% from 2021–25, and once 2021 goes out of the rolling 5-year period, the average would be much lower.
Also, the margin has stayed around 40-42% since 2021, which makes your base case of 47.5% by 2035 a bit too optimistic.
Having said that, I still think it's a good business to buy at current prices, but I'd call it around fair value rather than cheap. I have a starter position and plan to add more on any further downside.
Some good caveats.
The 2021 year was a rebound, but from 2019 to 2021 which smooths out this rebound they still grew 14% CAGR. So 2019 to 2024 say was above 15%, without the rebound effect.
As the growth was rapid in 2021 and 2022, the normal operating leverage has been offset in my opinion has this growth has slowed down and they spend some of the cash from this high profit cylical peak to expand cost basis. The period 2012-2019 also was range bound 32-34% operating margins, but now has jumped up nicely. It may not be smooth operating leverage, but as long as they continue increasing prices above inflation of their cost base, they will show operating leverage. Looking out further over any 10 year rolling period starting 2006, they have made strong progress with operating leverage of 5-6% points.
Keeping it at the current levels, espically when the past 2 years have had negative currency affects where lots of their costs in Euro's, is too conservative for me as a base case.
Fair points, thanks. I only looked at the margin over the last five years, and you're right that it has moved up in steps rather than smoothly, so another step up isn't unrealistic.
I'm still a bit hesitant because the last big jump came with the very fast growth of 2021. Getting to 47.5% needs another jump of that size while growth is running closer to 6%, so I'd want to see price rises clearly running ahead of costs first. The full-year results in February should give a better read on that.
Yep. Either way, doesn’t too dramatically change things when going from 42% to 47% vs say 21% to 27%, relative wise change in OpPr.
My bigger worries are the brand strength, The Game that people have to play now and puts some % off, which potentially could damage them longer term, although Ferrari also sort of has this and buying a Rolex also, so many examples where it hasn’t put people off as in some ways makes in more exclusive and the wait for the item makes some desire it more once they achieve it.
China economy stablising eventually also watching, as well as measures they are/may take against the wealthiest Chinese
Leather goods makes the base case look reasonable to me. It grew 10.2% at constant currency in Q2 against about 7% for the group, and that’s the part limited by how fast Hermès can train artisans.
Only recently. They have actually been growing the non-leather goods faster than leather goods over the last 10 years I believe.
Hermès is about the closest thing to a bond with pricing power in luxury, which is exactly why it almost never gets cheap. I own the space through LVMH, bought into the cyclical weakness, and the lesson I keep relearning is that with franchises this rare the real mistake is waiting for a valuation quality like that rarely gives you. Where would you actually want to add?
RMS (Hermes International)
Dal punto di vista grafico non ci sono segnali di inversione del titolo. Il mercato rimane molto negativo e il prossimo supporto è a 1118 quindi anche molto lontano.
Do you think the exit multiple should still be 20x EV/EBIT when the terminal growth rate is likely to be only MSD?
Yes, a terminal growth rate of MSD is very very appealing at a 20x multiple. Not many companies I think I’d ascribe such a terminal growth rate
There is a very thin line between true luxury and fashion and the economics at either side are very different