Is Hermes A Buy After The Drop?

Core Viewpoint - Hermes' stock is currently experiencing a 20% drawdown, attributed to fears of a global recession and a slowdown in China, which significantly impacts luxury demand [2][3]. Group 1: Market Concerns - The decline in Hermes' stock price is linked to investor fears regarding a potential global recession and a slowdown in the Chinese economy, which is crucial for luxury brands [2]. - There is a noted decrease in foot traffic from aspirational luxury clients in China, although Hermes' CEO indicates that Chinese consumers are still seeking high-quality products [3]. Group 2: Valuation Analysis - An inverse DCF model suggests that Hermes must achieve a 10% CAGR in Free Cash Flow over the next 20 years to justify its current valuation, with specific growth rates of 16% CAGR in the first five years, 12% in the next five, and 8% and 7% in the subsequent periods [4][9]. - The required revenue and operating income growth rates for the first five years are both set at 12% CAGR, indicating a strong expectation for performance despite current market conditions [8][9]. Group 3: Historical Performance - Over the past decade, Hermes has compounded its Free Cash Flow at a 23% CAGR, with a significant portion of this growth attributed to multiple expansion [5][9]. - Historical data shows that Hermes has previously faced similar inventory buildup issues, which have not resulted in long-term negative impacts on cash conversion [7]. Group 4: Competitive Landscape - Comparisons with LVMH indicate that while Hermes has a strong growth trajectory, it may not replicate LVMH's inorganic growth strategies, which could affect its valuation multiple [10][11]. - LVMH has achieved a 12% CAGR in Free Cash Flow over the past two decades, suggesting a robust luxury market potential that Hermes could tap into [10]. Group 5: Future Outlook - The company is expected to benefit from a "flight to quality" among consumers, which may insulate it from broader economic downturns [2][3]. - A potential further decline in stock price due to economic conditions could present an attractive buying opportunity for investors looking to increase their positions in Hermes [11].