Value vs Luxury – Sean Peche
*This content is supplied by Sean Peche, Portfolio Manager at Ranmore Fund Management Ltd
First appeared on LinkedIn
Sean Peche has always been wary of high prices as a value investor, especially in luxury goods. Companies like Burberry, despite their historical quality, are struggling. Burberry's shares have fallen 72% since April '23 highs, hitting 13-year lows. With higher interest rates, banks might now be more attractive investments. Over the past five years, the European Banks Index has outperformed the Goldman Sachs European Luxury Goods Index by 13%. Banks trading at 7x earnings with dividend yields above 7% offer more predictable earnings and potential re-rating. While luxury goods still trade at 24x earnings, does the landscape favour value over quality? Sean Peche investigates.
As a value guy, I'm scared of high prices, so I have always struggled with luxury goods companies.
I guess I'm not sure I'd look good in a Burberry Bucket hat.
And at £320 a piece, I am not about to "check."
"But Luxury goods companies are quality businesses founded hundreds of years ago with wide moats.."
Yes, but many Banks pre-dated them, and it's much easier to launch a luxury brand today than a bank
Now I agree that many "have been" quality businesses (past tense) – Burberry enjoyed average Gross margins of 69% and ROEs of 22% over the past ten years
But those variables haven't stopped the share price from falling 72% since April '23 highs to 13-year lows.
Things change
And we want to be alert to change.
So, yes, they WERE outstanding businesses when interest rates were low and money was free,
But those days may be over.
Perhaps today's environment of higher interest rates favours banks.
Do you know that the European Banks Index has beaten the Goldman Sachs European Luxury Goods index by:
48% over one year
66% over two years
71% over three years
13% over five years
Banks aren't widely considered "quality" businesses, but their business models seem to offer better earnings predictability than luxury goods companies today.
Ok, but hasn't Luxury already taken the pain with the shares down a lot?
Maybe
Except Kering said in April
"Considering the deterioration of its revenue trends, the Group now anticipates a 40 to 45% decline in first-half 2024 recurring operating income compared to the first half of 2023."
This week, Burberry warned, "The Luxury market is proving more challenging than expected" and "The weakness we highlighted coming into FY25 has deepened."
Even the mighty Richemont only reported 1% sales growth for the June quarter.
And just because the share prices are down doesn't mean they offer value.
The Luxury Goods index is still trading at 24x earnings.
The European Banks index is trading at 7x.
Remember that your return comes from 3 sources:
- Earnings growth
- Dividends
- Re-rating
- Earnings growth seems off the table for luxury goods
- The dividend yield for most companies is below inflation
- And earnings multiples hover around 20x
Compare that to European banks where:
- AI cost savings, a resilient consumer, and buybacks could help earnings growth
- Many have dividend yields above 7%
- And their mid-single digit PE ratios offer some re-rating potential
So we'd love to buy luxury goods companies.
But only at the right price – offering real returns.
So, do you think Value will beat Quality from here?
Yes, I think so
I know it hasn't for the last ten years.
But things change.
Disclosure:
- Ranmore Global Equity Fund holds 0% of the companies mentioned.
- The content of this marketing material is provided for information purposes only and is not advice.
- Past performance is no guarantee of future performance.
Disclaimer:
- Ranmore Global Equity Fund plc is approved in terms of section 65 of the Collective Investment Schemes Control Act (2002) for marketing and distribution in South Africa. Collective Investment Schemes (CIS) are generally medium to long-term investments. The value of shares in the Fund may go down as well as up, and past performance is not necessarily an indication of future performance or returns.
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