Hermès International SCARMS:EPA

Hermès still trades at a premium to its peers, but we believe the market now undervalues the durability of its advantages.

Indeed, we believe Hermès still has superior operating margins and quality compared to its peers. The forecasted growth, even though reduced compared to the last decade, is still at the upper end of peers, while the operating margin is by far the highest, being 2 times the peer average.

Investment Thesis

• Emotional Connection: Hermès produces genuine emotions in customers, leading to higher margins, greater pricing power, and increased resilience. The connection to the House is expected to become increasingly important in the future across all luxury players.

• Distribution: The largely proprietary model (more than 92% of revenue comes through its exclusive distribution network) helps protect the brand and better monetize this desirability.

• Scarcity: Artisanal production limits the speed at which Hermès can increase volumes. As long as demand exceeds this capacity, scarcity is structural rather than merely a marketing tactic.

Valuation

Given Hermès’ persistent premium compared to its peers, we believe that applying a multiple to earnings per share is the most relevant valuation approach for our base case.

Our 35.3x P/E multiple, representing Hermès’ median NTM P/E since 2002, reflects our expectation that Hermès can sustain superior margins and earning growth beyond FY30. This exit multiple would provide the investor with a 15.7% annualized total return until FY30 (accounting for dividends, 14.4% just on the share price).

We also use a DCF valuation as a cross check to our multiple based approach. Using a WACC of 8.51% and a terminal growth rate of 2.5%, the DCF yields a share price of €930, representing a 30.2% downside from the current share price. The difference between our DCF and multiple valuation is thus an important part of the investment debate rather than a reason to disregard the DCF.

Full note and exhibits in the PDF above.