Once a company builds a a strong and durable moat around its business, its future cash flows are secured. Some luxury brand companies have, indeed, built huge barriers to entry, allowing these businesses to charge large price premiums for their products. Some of this businesses, such as Luxottica Group SpA (ADR) (NYSE:LUX), own a huge part of the industry they operate.Let’s take a look at three luxury companies that have built resilient businesses around their brands and distribution networks.
America’s most glamorous jeweler
Tiffany & Co. (NYSE:TIF) represents one of the best-managed and most dominant brands among international retailers. Its sales make it the world’s second largest jewellery retailer, and its brand its expanding fast around the world while not losing any of its luster. Besides, the company utilized the recent economic downturn as an opportunity to reevaluate its cost infrastructure. Since the 2009 crisis, Tiffany & Co. (NYSE:TIF)’s management reduced headquarters and store staffing, and focused its expansionary efforts on emerging markets and smaller boutiques in the US. I expect the company will be able to show ameliorated margins as lower commodity prices flow through Tiffany & Co. (NYSE:TIF)’s income statement.
Beating first quarter EPS consensus estimates by 34% and growing sales at a 9% year-over-year (yoy) rate, I think Tiffany & Co. (NYSE:TIF) is a great buy if you want a long term investment. The company trades at 2013 22x P/E and pays a 1.65% cash dividend yield.
Made in Italy for the entire world
Luxottica Group SpA (ADR) (NYSE:LUX) owns many the world’s most famous sunglasses brands, such as Ray-Ban, Oakley and Persol. During January of this year, the company presented last year’s full results–and the figures were impressive. In 2012 Luxottica Group SpA (ADR) (NYSE:LUX) recorded its highest ever earnings as 4th quarter sales were up by 8.2% yo, and its 26% yoy top line growth in emerging markets does not surprise me. The company says that 2013 will also be a great year, and expects sales to be 10% higher than in 2012. Its vertically integrated supply and distribution chain is a very tough barrier to entry for new players. As a matter of fact, most companies (from Tiffany & Co. (NYSE:TIF) to Prada and Giorgio Armani) just hand-in their sunny businesses to Luxottica Group SpA (ADR) (NYSE:LUX).
Trading at 2013 28x P/E and paying a 1.2% cash dividend yield, Luxottica Group SpA (ADR) (NYSE:LUX) looks fully priced. That said, luxury (and a great, durable business) always fetches a high price tag.
The complete worldwide luxury champion
I think , best know as , is the best luxury goods company in the world. Its amazing brands and powerful distribution network makes the wines and spirits to watches and handbags company a unique asset. Besides, LVMH, which is still growing its top line at full-speed, trades at relatively low multiples.
After the recent weakness in LVMH’s shares (the company is down by almost 6% year-to-date), I see irresistible long-term value in the shares. With some parts of its brand portfolio working extremely well, such as DFS, Sephora, Bulgari, Dior perfumes and Hennessy, I think LVMH is an unavoidable long for anyone looking to get some exposure to the luxury market.
All the above taken into account, the fortunes of Moet Hennessy Louis Vuitton ultimately depend on Louis Vuitton’s top-line growth in Asia. Since the brand is not opening additional stores in order to protect long term brand exclusivity, any improvement essentially depends on local demand picking up in China. While narrowing price gaps versus Europe may help Asia, its very tough to predict short term demand growth in China.
Growing year-over-year sales by 7%, trading at 2013 18x P/E and paying a 2.5% cash dividend yield, LVMH is my favorite pick in the luxury market.
Bottom line
I believe all the three companies named above own great brands and have a huge future coming from top line growth in emerging markets. While LVMH is a multi-brand luxury conglomerate that sells everything from bags to wine, Tiffany & Co. (NYSE:TIF) is a concentrated bet on jewelry. Luxottica Group SpA (ADR) (NYSE:LUX) is also a multi-brand company, but purely focused on the high-growth-high margin eye wear business. I would personally go long on all of them.
While Luxottica (with a market capitalization of $24 billion) and Tiffany (with a market capitalization of $9.9 billion) could be M&A targets going forward, LVMH (with a market capitalization of $88 billion) is a great and much more stable asset to own just to enjoy its growing cash dividends.
The article Three Luxury Brands With Adamant Businesses originally appeared on Fool.com.
Federico Zaldua has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Federico is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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