Stocks of luxury goods in Europe have room to run up, but they get expensive

LONDON (Reuters) – Europe’s luxury companies, the region’s top stock market performers in 2023, may see more gains driven by a rebound in Chinese spending, but for some the sector is starting to look too expensive.

The likes of French luxury giant, Louis Vuitton owner LVMH, and Swiss jewelry company Richemont (CFR.S)They benefited from the resilience of their wealthy clients in the face of the cost of living crisis.

Since the beginning of 2023, China’s decision to allow more normal activity and to loosen its stringent COVID-19 restrictions has provided another boost to the sector.

Catalog of European luxury goods retailers (.dMIEU0TA00PUS) Up 18% so far this year, outperforming Europe’s broader STOXX 600 index (.STOXX)which is up 6.2% in the same time frame.

But the fact that luxury goods companies aren’t as cheap as they used to be is “a concern/point of interest,” said Kasper Elmgren, head of equity at Amundi, Europe’s largest asset manager.

“It is more fairly appreciated today, and there is probably less that has not been discovered. The danger is that when something moves until it is priced in to perfection, there is always a greater risk of disappointment.”

The price-to-earnings ratio for the MSCI Europe luxury index is around 26, while the broader STOXX ratio is closer to 13, according to Refinitiv data.

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Historically, European luxury has traded at a significant premium compared to the broader market, but this has widened further in recent years. At 23 times forward 12-month earnings, its current premium of 82% is nearly twice the 20-year average, according to Refintiv Datastream.


Apple Eye Europe

LVMH, the most valuable company in Europe by market capitalization, has a PE ratio of about 30, while its competitor Hermes (HRMS.PA) It has a rating of nearly 60, according to Refinitiv data. an Apple (AAPL.O)the most valuable company in the world, has a PE ratio of about 23.

The reopening of China is the main issue for European luxury stocks this year, and they are already priced in by at least 50%, said Jelena Sokolova, senior equity analyst at Morningstar.

“At the moment we don’t see this sector being undervalued anymore… There were some opportunities last year, but they’re somewhat overvalued now, or a bit overvalued right now,” she said.


In a January research note, UBS analysts said 2023 is the “Chinese consumer’s year of European luxury,” highlighting Richemont and Hermes. (HRMS.PA) and the Italian luxury group Moncler (MONC.MI) as their top picks and “the most balanced, high-quality plays about reopening China”.

Persistent fears of a recession, an expected drop in earnings expectations, and high inflation mean that potential returns on luxury stocks could be a boon in what promises to be a tough year for stock pickers.

The ability to increase product prices without losing customers has emerged as a major strength for luxury brands in Europe, and remains a focus for equity investors even as inflation eased on the continent in December.

“The stuff they sell doesn’t really depend on the price they charge, the average product price at Cartier is $10,000 whether it goes up to $11,000 is neither here nor there,” said Nick Clay, head of global equity income at Cartier. Redwheel investment manager.

These stocks have more room to run as Chinese consumers hit stores again and luxury companies flex their pricing power. But with valuations already fairly high, investors are wondering how far they can go higher.

LVMH’s latest earnings showed a 9% rise in organic sales in the fourth quarter as shoppers in Europe and the United States splurged during the holiday season, which partially helped offset COVID-19 disruptions in China.

But some analysts focused on margins, removing some of the sheen from the sales increase in the most recent quarter. However, it had little impact on the share price, which has risen 600% in the past 10 years, compared to a 91% gain in the STOXX benchmark.

“Companies like LVMH have high-quality businesses, compound earnings 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 that they are slightly unequal, but in the long run the accumulation of profits is the dominant factor.”

(Reporting by Lucy Raetano and Danilo Masoni); Editing by Amanda Cooper and Sharon Singleton

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