France’s LVMH (LVMUY) is a titan in the global luxury goods industry and is guided by billionaire Bernard Arnault and his family.

The company’s brands include Louis Vuitton, Moet Hennessey, Christian Dior, Tiffany, Givenchy, Sephora, Bulgari, Tag Heuer, Princess Yachts, and many brands spread across these broad categories: fashion and leather goods, perfumes and cosmetics, watches and jewelry, wine and spirits, and selective retailing (including hotels).

This sprawling luxury empire was a major beneficiary of the pandemic, as people splurged on luxury. But now, the industry-wide growth is softening to a more normal historical pace after a three-year boom. The buoyant start to 2023, which briefly pushed LVMH past a $500 billion market valuation, is a distant memory.

The market slowdown is a problem in itself. And LVMH has another problem: it is being penalized by the market for its wide collection of luxury businesses. Yes, the luxury giant’s stock is suffering from a classic conglomerate discount.

Let’s take a look…

Sum of the Luxury Parts

Shares in LVMH trade on about 16 times this year’s estimated earnings before interest and tax—less than half of Hermes International’s (HESAY) 34 times. The LVMH valuation reflects concerns that its sheer size means it cannot grow as fast as Hermes and others, especially considering that Dior is decelerating after a remarkable run of success.

The current markdown sale price on LVMH stock looks to have gone too far. After all, the company could generate $13.4 billion of operating profit this year—an impressive 51.8% of sales, according to estimates from HSBC analysts.

This deep discount is why Bloomberg’s Andrea Felsted argued in an opinion piece for a breakup of LVMH, writing:

For example, by putting Louis Vuitton and Dior on a multiple closer to that of Hermes than the rest of the fashion and leather-goods sector, these brands could be worth as much as the whole group, which currently has an enterprise value of about $363 billion.

I find myself in agreement with Felsted’s logic. In effect, when you buy LVMH stock, you are getting all the other luxury brands for free. If a breakup were to happen, the now-independent fashion and leather-goods business would still dwarf rivals.

For example, Louis Vuitton is still expected to be well on its way to the next milestone of €30 billion ($32.78 billion) in sales in the next few years, according to estimates from HSBC. “At that size,” Roberto Costa, head of global luxury investment banking at Citi, told the Financial Times, “every year they create the equivalent of a new company [in terms of growth.] It’s such a strong brand that it will continue growing.”

Buy LVMH Stock

I don’t know if the LVMH empire will ever be broken up. But I do know that luxury will always have its appeal and that the stock is currently cheap: luxury’s momentum during the pandemic has burnished its enduring appeal, prompting comparisons to the dominance of technology stocks in the U.S.

But these iconic brands enjoy a pricing power that typically beats inflation and protects their profit margins. That’s why luxury companies are usually much more resilient than other consumer categories: the strength of their brands.

I believe 2024 will be the opposite of 2023, which started gangbusters and faded badly. 2024 will start slowly and then pick up speed as the year goes on, particularly in China. Chinese consumers currently account for about a quarter of the estimated $397 billion global luxury market and potentially 40% by 2030.

Over the years, critics have fretted that LVMH’s increasing size risked making it too mainstream to be considered luxurious and exclusive. That it would lose its snob appeal.

Horse hockey!

LVMH’s fully controlled distribution channel allows it to avoid discounting its products, which boosts profitability (operating margins over 40%). And many of LVMH’s brands hold leadership positions in their respective industries—thanks to their 100+ year history—and have a record of above-industry growth and market share gains.

I believe we’re going to see the further polarization of the luxury industry in two ways: first, the bigger brands outperforming the smaller ones, and second, the top end of the luxury pyramid outperforming the more aspirational brands. The key thing in 2024 will be that high-net worth individuals will drive growth, rather than middle income consumers.

Therefore, there will be a big stock performance gap between top players like LVMH and Hermes, and the industry’s laggards. That makes LVMUY a buy here, at around $150 a share.