Kering is a French-based multinational corporation specializing in luxury goods that owns prestigious brands such as Balenciaga, Bottega Veneta, Gucci, Alexander McQueen, and Yves Saint Laurent.
Kering stock was down 22% during the last year as a bearish market hurts confidence across the globe. The context of high inflation and rising interest rates has brought particular skepticism towards sectors reliant on discretionary spending, explaining contractions in value seen across Kering’s competitors.
Contrarian to the market uncertainty, both the luxury industry and Kering have shown to be extraordinarily resilient compared to other sectors. Actually, crises are periods when rich people tend to get richer while poor people get poorer by benefitting from the opportunities that arise in financial assets such as Real Estate as a consequence of a higher unemployment rate. Due to other additional factors, luxury conglomerates demand has stayed quite resilient compared to other consumer discretionary goods whose demand decreases sharply during economic downturns.
If we review the company´s performance during the last years, it has improved year over year except during the COVID-19 pandemic when it showed the resilience mentioned above. The company and other conglomerates in the industry show high margins and a diverse product portfolio that make its performance and growth quite resilient from a long-term perspective. Besides, the company shows a strong financial position and health that can allow the firm to make further investments in the future.
If we compare it against the other luxury conglomerates that lead the industry, the company is not outperforming them and therefore is trading at a lower P/E ratio (around 15x vs. 22-30x for peers). Although a lower P/E multiple seems realistic as a consequence, I think we must also compare it against other companies within other industries, which are traditionally considered as “high growth” that are trading at higher multiples while performing poorer than Kering.
In my opinion, the whole luxury industry is quite undervalued due to its extraordinary resilience in a great variety of scenarios, and their companies should be trading at higher multiples than the current ones. Contrarian to what most investors think, I do not believe extraordinary companies with great sustainable competitive advantages within other industries should be trading at higher multiples (sometimes above 40x) than some industry leaders within other industries that offer much more stability during economic downturns (around 15-25x in normal conditions). From my perspective, these luxury companies offer much less downside risk than what the market thinks, and have a great potential upside that can make them trade around 30x during growth peaks, which is a much better risk-return relationship than falling from 30x to 15x like those “great sustainable competitive advantages” do when economic downturns make them perform poorer. In other words, markets tend to value growth more than stability, and comparables will never be a good valuation method to justify the market price for a stable company if the industry peers are undervalued as well. Consequently, in this particular case, I think trading multiples should be higher for every luxury conglomerate at present, including Kering, whose 15x P/E ratio is too low compared to the performance the company is showing.
Lastly, you can also note this from a consensus perspective. It is covered by 27 analysts and only one recommends selling the stock. And they do not do it due to evident and valuable resilience. Some of them might be more optimistic about its future performance than others (in spite of having been quite consistent), but at the current valuation of around 15x P/E ratio, it is unrealistic to recommend selling because of its valuable resilience.
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