Buy Birkin Bags, Sell Shares as Analysts Unanimous Hermes Is Too Expensive

Hermes International SCA stock is just like its $7,000 Birkin bags: expensive.

Based on a measure of price-to-earnings, Hermes stock is about 78 percent pricier than competitors including LVMH Louis Vuitton Moet Hennessy SA, according to Bloomberg data. None of the 25 analysts that cover the stock recommend buying, while 20 suggest selling, the data show.

According to analyst Antoine Belge at HSBC, the shares owe their valuation to speculation the descendents of founder Thierry Hermes may sell. The stock rose as much as 4.5 percent on May 3, the most in 10 months, following the May 1 death of former President and Chief Executive Officer Jean-Louis Dumas. Hermes yesterday reported a 19 percent increase in first-quarter sales, surpassing analysts’ estimates and outperforming rivals.

“If you do a valuation on the fundamentals it is very hard to come up with a buy recommendation,” Belge said. He has a “neutral” rating on the stock.

Hermes Chief Executive Officer Patrick Thomas said yesterday that Dumas’s death doesn’t change the founding family’s attachment to the 173-year-old company. The family owns about 74 percent of the Kelly purse maker’s shares.

Hermes is the world’s least-loved luxury stock among companies with at least five recommendations, Bloomberg data show. The shares trade on an estimated price-earnings ratio of 31.3, compared with 18.6 for LVMH and 21.2 for Cie. Financiere Richemont SA. The average ratio for the 13-member Bloomberg European Fashion Index is 17.6 times.

‘Not Justified’

“It’s just not justified to have such a big premium over the peer group,” said Claudia Lenz, an analyst at Bank Vontobel AG in Zurich. Lenz has a “reduce” recommendation on the stock, which rose 13 cents, or 0.1 percent, to 99.3 euros in Paris trading yesterday.

The increase in Hermes’s first-quarter sales was driven by demand for leather goods in Asia. Growth outpaced an 8 percent gain, excluding currency shifts, at LVMH’s fashion and leather goods business, and a 4.7 percent rise at Gucci Group NV, PPR SA’s luxury unit, in the same period.

Hermes’s operating margin in 2009 was 24.2 percent, compared with LVMH’s 19.7 percent and Richemont’s 18.1 percent.

To contact the reporter on this story: Andrew Roberts in Paris at aroberts36@bloomberg.net.

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