Saturday, August 26, 2017

114,000 Words

Having finished my series on The Cult of the Luxury Brand, I wanted to look back at my investment writing and see how I've done:

Since January 2014, I've written over 114,000 words for Seeking Alpha. (For comparison, the average novel is 80,000 to 100,000 words long).

Thank you to all of my readers, as well as everyone else who's supported me in my writing!

Thursday, August 24, 2017

Conclusions And Final Thoughts On 'The Cult Of The Luxury Brand'

For the past two months, I have been writing a series of articles for the investing site Seeking Alpha about The Cult of the Luxury Brand, a book about the luxury industry’s rise in Asia. In those articles, I have used a model from the book, the “Spread of Luxury” model, to estimate the future growth of three of the industry’s largest companies: LVMH group, Compagnie Financière Richemont, and Kering SA. Using those growth estimates, I have projected the annualized returns a long term investor in those companies might be able to look forward to.

However, there is much more to Chadha and Husband’s book than the “Spread of Luxury” model. The book offers many interesting insights about the Asian luxury market, drawing upon fields as diverse as history, philosophy, and psychology to do so. Moreover, though the long term returns I have projected for the major companies in the industry have been fairly uninspiring, I feel the underlying reasons behind those returns provide interesting lessons about how the market views those companies and the industry as a whole. (Read More)

Friday, August 18, 2017

Valuing Kering Through 'The Cult Of The Luxury Brand,' Part 2

In a recent article written for the investing site Seeking Alpha, I described how The Cult of the Luxury Brand, Radha Chadha and Paul Husband’s book on the luxury industry in Asia, could be used to predict the industry’s growth on that continent.

Since then, I have been using a model from that book, the "Spread of Luxury" model, to calculate the future growth of luxury conglomerates such as LVMH group and Compagnie Financière Richemont. LVMH, the owner of such brands as Louis Vuitton, Bulgari, and Marc Jacobs, is the world’s largest luxury goods company. I projected that the company would grow at around 4.6% per year for the next 33 years for a total annualized return of 5.24% taking into account dividends and changes in valuation. Similarly, I calculated that Richemont, the owner of such brands as Cartier, Dunhill, and Piaget, would grow at around 5.13% annually, for a total annual return of 5.76%.

Having calculated the future growth of LVMH and Richemont, I will now do the same with Kering SA. Along with LVMH and Richemont, Kering is the third of the three major luxury conglomerates profiled in Chadha and Husband’s book. Kering is also roughly tied with Richemont for the position of the world’s second largest luxury conglomerate. In my last article, I laid the groundwork for these calculations by estimating Kering's sales to customers from each of its major sales regions. In this one, I calculate how those sales will evolve and contribute to Kering's overall growth over the next several decades. (Read More)

Friday, August 11, 2017

Valuing Kering Through 'The Cult Of The Luxury Brand,' Part 1

In several recent articles, I have described how Paul Husband and Radha Chadha's book The Cult of the Luxury Brand offers us a model for estimating the growth of luxury goods companies in Asia.

That model, the “Spread of Luxury” model, describes how countries advance through several stages of luxury goods consumption. Each stage corresponds to not only a different level of economic development, but also a different level of consumption. Those stages range from “Start of Money,” in which few consumers purchase luxury goods, to “Way of Life,” in which a country’s luxury market is fully saturated. According to Chadha and Husband, the "Way of Life" stage is the end stage for Asian markets as they become fully developed.

I have applied this model to estimate the future growth of two of the world's largest luxury companies, LVMH group and Compagnie Financiere Richemont. I will now apply that model to Kering, the third of the three major luxury conglomerates profiled in Chadha and Husband's book and the owner of fashion brands such as Gucci and Yves Saint Laurent as well as sports brands such as Puma.

To do this, we first need to calculate where Kering's customers come from. This requires us to apply global trends in personal luxury goods sales to the company's sales around the world. Once we have done so, the next step is to predict the company's growth by forecasting the development of its per capita sales in each region. (Read More)

Wednesday, July 19, 2017

Valuing Compagnie Financiere Richemont Through 'The Cult Of The Luxury Brand,' Part 2

In a recent article, I described how The Cult of the Luxury Brand, Radha Chadha and Paul Husband’s book on the luxury industry in Asia, could be used to predict the industry’s growth on that continent.

The book’s model of Asian luxury consumption growth, known as the “Spread of Luxury” model, was interesting to me because it reminded me of how Warren Buffett conceived of Coca-Cola as an investment. Even though the company’s stock looked fairly valued by traditional metrics, Buffett knew that per capita Coke consumption abroad was likely to rise until it approached U.S. levels. Because of that, Coca-Cola’s stock was actually undervalued because the company could look forward to decades of growth.

Similarly, based on the “Spread of Luxury” model, the major luxury conglomerates should be able to look forward to decades of growth as per capita consumption in Asia outside of Japan approaches Japanese levels. However, what is important is calculating this growth and quantifying exactly how much luxury companies will benefit from it. 

In a previous post, I made these calculations for LVMH group, the owner of such brands as Louis Vuitton, Bulgari, and Marc Jacobs and the world’s largest luxury goods company. I calculated that the company could look forward to annual growth of about 4.6% for the next 30 years, resulting in a total annual return of about 5.2% taking into account dividends and changes in valuation.

Having done so, we will now make these same calculations for Compagnie Financiere Richemont, the owner of such brands as Cartier, Dunhill, and Piaget and the second of three luxury conglomerates profiled in Chadha and Husband’s book.

In my last post, I laid the groundwork for these calculations by estimating Richemont's sales to customers from each of its major sales regions. In this one, I calculate how those sales will evolve and contribute to Richemont's overall growth over the next several decades. (Read More)

Tuesday, July 11, 2017

Valuing Compagnie Financiere Richemont Through 'The Cult Of The Luxury Brand,' Part 1

In a previous article, I described how Paul Husband and Radha Chadha's book The Cult of the Luxury Brand offers us a model for estimating the growth of luxury goods companies in Asia.

That model, the “Spread of Luxury” model, describes how countries advance through several stages of luxury goods consumption. Each stage corresponds to not only a different level of economic development, but also a different level of consumption. Those stages range from “Start of Money,” in which few consumers purchase luxury goods, to “Way of Life,” in which a country’s luxury market is fully saturated. According to Chadha and Husband, the "Way of Life" stage is the end stage for Asian markets as they become fully developed.

In my most recent pair of articles, I used that model to estimate the future growth of luxury goods company LVMH group. Having done so, I will now apply that model to Compagnie Financiere Richemont, another of the world's largest personal luxury goods companies and the owner of such brands as Cartier, Dunhill, and Piaget. 

To do this, we first need to calculate where Richemont's customers come from. This requires us to apply global trends in personal luxury goods sales to the company's sales around the world. Once we have done so, the next step is to predict the company's growth by forecasting the development of its per capita sales in each region. (Read More)

Thursday, June 29, 2017

Valuing LVMH Group Through 'The Cult of the Luxury Brand', Pt. 2

In a recent article, I described how The Cult of the Luxury Brand, Radha Chadha and Paul Husband’s book on the luxury industry in Asia, could be used to predict the industry’s growth on that continent.

The book’s model of Asian luxury consumption growth, known as the “Spread of Luxury” model, was interesting to me because it reminded me of how Warren Buffett conceived of Coca-Cola as an investment. Even though the company’s stock looked fairly valued by traditional metrics, Buffett knew that per capita Coke consumption abroad was likely to rise until it approached U.S. levels. Because of that, Coca-Cola’s stock was actually undervalued because the company could look forward to decades of growth.

Similarly, based on the “Spread of Luxury” model, the major luxury conglomerates should be able to look forward to decades of growth as per capita consumption in Asia outside of Japan approaches Japanese levels. However, what is important is calculating this growth and quantifying exactly how much luxury companies will benefit from it. 

The first company I will make such calculations for is LVMH group. LVMH, the owner of such brands as Louis Vuitton, Bulgari, and Marc Jacobs, is the world’s largest luxury goods company. Thus, it is a logical first choice for our valuation method.

In my last article, I laid the groundwork for these calculations by estimating the company's sales in each of its major sales regions. In this one, I calculate how those sales will evolve and contribute to the company's overall growth over the next several decades. (Read More)

Monday, June 26, 2017

Valuing LVMH Group Through 'The Cult of the Luxury Brand', Pt. 1

In my most recent article, I described how The Cult of the Luxury Brand, Radha Chadha and Paul Husband’s book on the luxury industry’s growth in Asia, could be used to predict the industry’s growth on that continent.

Their book contains a model for the development of luxury consumption in Asia, the “Spread of Luxury” model. In that model, countries advance through several stages. Each stage corresponds to not only a different economic development level, but also a different level of luxury goods consumption. Those stages range from “Start of Money,” in which few consumers purchase luxury goods, to “Way of Life,” in which a country’s luxury market is fully saturated. According to Chadha and Husband, the “Way of Life” stage is the end stage for Asian markets as they become fully developed.

In using the “Spread of Luxury” model to estimate luxury goods conglomerates’ future growth, I will start with LVMH group (LVMHF) (LVMHY). LVMH owns brands such as Louis Vuitton, Bulgari, and Marc Jacobs. It is the world’s largest luxury company, with about three times the sales of its biggest rival.


To apply the “Spread of Luxury” model to LVMH’s operations, we first need to see what its sales in Japan and Asia outside Japan are. This is actually a surprisingly difficult question. (Read More)

Monday, June 19, 2017

Examining The Growth Of The Luxury Industry In Asia Through 'The Cult Of The Luxury Brand'

Radhu Chadha and Paul Husband’s book The Cult of the Luxury Brand: Inside Asia’s Love Affair With Luxury describes the rise of the luxury industry in Asia.

In the past 40 years, Asia has become the world’s largest market for personal luxury goods such as clothing and jewelry. According to Bain & Company’s Fall-Winter 2016 Luxury Goods Worldwide Market Study, Asians bought more than half of all luxury goods in 2016.

Chadha and Husband’s book examines the cultural and economic reasons for Western luxury brands’s popularity in Asia. For example, they argue that the conspicuous wearing of luxury clothing has become a way for Asians to define their position in society. This trend, they say, has been influenced by the significant social changes in Asia in the past half-century.

It is beyond the scope of this article to decide if such broad cultural analyses are correct. However, if they are, there are interesting implications for investment analysis. Chadha and Husband’s key model, based on their cultural analysis, is the “Spread of Luxury” model. According to the model, luxury good consumption in Asian nations passes through five stages based on the nations’ levels of development. If this is true, it opens up a way to project the growth of the luxury industry in Asia. (Read More)

Thursday, July 16, 2015

A Balance Sheet Quirk At Bank Of America

Back in late 2011, I read John Hempton's March 2010 post about Repo 105 like transactions at Bank of America on his blog, Bronte Capital. Hempton, an Australian hedge fund manager and one of my favorite bloggers, wrote about how you could detect evidence of the transactions--which he described as being intended to make the bank look less risky before end of quarter reporting--by comparing the bank's average assets in a quarter to its assets at the end of the quarter.

Hempton's example was from 2006, but I used the same method to look at Bank of America's 2010 and 2011 results and was surprised to discover similar results. I initially planned to write about it then, but events intervened and I didn't have the chance to do so.

Well, I've finally written about this, taking into account the additional three and three-quarters years of financial results that have passed since then. The results are a little more ambiguous than they were back in 2011, though I think they're still interesting. Anyway, they can be found in my most recent SeekingAlpha article here.

Thursday, March 26, 2015

Examining The Beer Industry Through Philip Van Munching's 'Beer Blast': The Risks Of Growth

There is a running theme in my articles about Beer Blast, Philip Van Munching’s history of the beer industry in the late 20th Century. That theme is that change is often bad for companies.

In my first article about the book, I described how companies’ introduction of new products often only damaged their brands. In my second, I showed how trying to change a beer brand’s qualities to save money or to make it more modern also damaged their brands. In both of these articles, change was bad for beer companies even when it was desired.

Growth is probably the type of change that companies desire most. Growth, after all, is what drives stock prices up. When a company is growing, it can hire new employees and promote old ones. And, of course, leading a growing company brings benefits for management. Managers, like most people, enjoy seeing their areas of responsibility expand. Such expansion comes with bigger salaries and higher status in their industries. No wonder corporate executives are always trying to grow their companies.

However, Beer Blast shows that even growth, the most desirable form of change, can be more problematic than anyone can imagine. (Read More)

Saturday, March 21, 2015

Special Dividends And A Looser Credit Agreement May Signal A Turnaround At QC Holdings

I recently wrote an article for SeekingAlpha about alternative finance company QC Holdings (QCCO). The company has seen its revenues and earnings fall significantly since 2008, which has caused its stock price to plunge nearly 80%.

That said, the company may be going through a turnaround. It has declared special dividends two quarters in a row after not being able to pay dividends for a year. This shows that management is confident in the company's future--or at least confident that they don't need to hold onto more cash to deal with future problems. The company's credit agreement, which controls the terms of its loans, has also become less restrictive. This mean that the company's bankers are less worried about its financial situation. Given than QC Holdings' management and bankers are probably the people who understand the company's prospects best, this is a strong endorsement of the company's future.

Anyway, the article can be found here. It was chosen for SeekingAlpha's Pro program, meaning that it will only be available to non-paying members for a month, so I hope you'll check it out soon!

Monday, March 16, 2015

Examining The Beer Industry Through Philip Van Munching's 'Beer Blast': Brand Image

In my most recent article, I discussed the beer industry’s quest for new products as seen in Beer Blast, Philip Van Munching’s history of the industry in the late 20th Century. Van Munching argues that the industry’s constant introduction of new beer varieties has diluted the value of existing brands, hurting beer companies’ brand image.

However, Beer Blast does not only discuss brand image in the context of new products. Van Munching was the advertising director at Van Munching & Co., the former US importer of Heineken (HEINY) (HINKF). As a result, his book goes into great detail about the image strategies of several major American beer brands, offering insights about both their successes and failures.

Though Van Munching’s book was written in 1997, I feel such insights remain valuable for investors. For example, Beer Blast shows that beer companies are similar to luxury goods companies. Customers often use the brand of beer they drink to define their self image and the image they project to others. In this, they treat beer the way they treat luxury goods such as fashion items, which are similarly used to craft one’s personal image.

This may seem obvious, but...(Read More)