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)

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