Two hundred billion
07 June 2023
This is the market capitalization of Hermès. This is unreasonable. For a long time, Hermès was valued at a very high price because it had the status of a golden nugget, coveted by the major players in the sector. In 2010, LVMH acquired a stake in the company through a complex transaction that had been in the works for a long time. At the time, Hermès was worth less than twenty billion euros. It was still a reasonable size to make it a target. This is no longer the case. At a value of €200 billion, there is no longer any acquisition possible. So the only way to justify the valuation is in the figures. In the five years following the 2008 crisis, Hermès was already paying 7 times sales. Just before the pandemic, we went up to 9 times. Today, we're at 15 times. At this valuation level, the slightest difficulty in execution can push multiples back to their previous values. The coming recession is likely to bring these difficulties.
To put this 15x sales figure into perspective, we recall Sun Microsystems CEO Scott McNealy's response two years after the bubble burst in 2000: "To pay you back in 10 years, at 10x sales, I have to pay you 100% of sales in dividends for 10 years in a row. [...] That means zero expenses, which is quite difficult when you have 39,000 employees. It means I pay no taxes, which is very difficult. And it means not paying taxes on your dividends, which is illegal. It also means being able to maintain my sales level without R&D for the next 10 years. [...] Do you realize how absurd these assumptions are? [...] What were you thinking?" And we were with one of the first tech companies on the eve of the PC/Internet revolution. Now we're at fifteen times the sales of a handbag salesman.
So we're looking at buying put options on Hermès. And here's the icing on the cake: Hermès is one of the heavyweights of the CAC40. It is therefore present in all passive management portfolios. And consequently in most active management portfolios, because there aren't many people left, even on that side of the market, who dare to deviate from the indices. So everyone's got Hermes, no one's moving, and as a result, volatility is low. So puts are much cheaper. To give an order of magnitude, these options are worth 40% less than they should be. So for the same amount invested, you get two-thirds more. And so, if the accident explained above occurs, the final gain will be significantly higher.
It's this asymmetry that we're looking for in our optional bets. We have about ten of them. Not all of them will work, but you only need a few.
Disclaimer
This presentation is a promotional document. The content of this document is communicated by and is the property of Monocle Asset Management. Monocle Asset Management is a portfolio management company approved by the Autorité des Marchés Financiers under number GP-20000040 and registered with the ORIAS as an insurance broker under number 10058146. No information contained in this document should be construed as having any contractual value. This document is produced for information purposes only. The prospects mentioned are subject to change and do not constitute a commitment or a guarantee. Access to the products and services presented here may be subject to restrictions for certain persons or countries. Tax treatment depends on individual circumstances. The fund mentioned in this document (Monocle Fund SICAV) is authorized for marketing in France and possibly in other countries where the law permits. Before making any investment, it is advisable to check whether the investor is legally entitled to subscribe to the fund. The risks, costs and recommended investment period of the funds presented are described in the KIDD (key investor information documents) and the prospectus, available free of charge from Monocle Asset Management and on the website. The KIDD must be given to the subscribers before the subscription. Past performances are not a reliable indicator of future performances. Monocle Asset Management cannot be held responsible for any decision taken or not taken on the basis of information contained in this document, nor for the use that could be made by a third party. The investor may lose all or part of the amount of capital invested, as the funds are not capital guaranteed.
To unsubscribe or for any information request, you can email us at monocle@monocle.lu
