We
believe
the
luxury
sector
is
largely
fairly
valued,
incorporating
more
subdued
near-term
demand.
This
is
unlikely
to
persist
in
the
long
term
because
luxury
industries
usually
bounce
back
quickly
from
cyclical
downturns.
A
handful
of
stocks
screen
as
undervalued.
We
don’t
see
the
current
cyclical
weakening
of
demand
to
be
long
lasting
because
based
on
the
industry’s
past
30
years,
periods
of
subdued
demand
didn’t
last
more
than
two
years.
4
Attractive
Luxury
Stocks
•
Kering
(KER)
•
Burberry
Group
(BRBY)
•
Swatch
Group
(UHR)
•
Hugo
Boss BOS
Key
Morningstar
Metrics
for Kering
• Fair
Value
Estimate:
€464.00
•
Morningstar
Rating:
5
stars
•
Morningstar
Uncertainty
Rating:
Medium
•
Economic
Moat:
Narrow
Kering
is
the
second-largest
luxury
group
by
revenue,
trading
at
18
times
consensus
earnings
(which
we
believe
are
close
enough
to
trough
levels),
60%
upside
to
our
fair
value
estimate.
Although
Kering’s
flagship
Gucci
brand’s
momentum
is
slowing,
its
strong
brand
recognition,
significant
marketing
resources,
control
over
distribution
(greater
than
90%)
and
access
to
top
managerial
and
creative
talent
ostensibly
put
it
in
a
position
to
maintain
its
pricing
and
desirability
in
the
long
run.
Key
Morningstar
Metrics
for Burberry
Group
•
Fair
Value
Estimate:
£16.80
•
Morningstar
Rating:
4
stars
•
Morningstar
Uncertainty
Rating:
High
•
Economic
Moat:
Narrow
Despite
its
recent
history
of
sluggish
growth,
we
believe
Burberry
benefits
from
high
brand
recognition,
pricing
power,
and
strong
control
over
distribution,
all
of
which
support
its
narrow
moat.
The
stock
is
trading
at
17
times
forward
earnings,
which
we
believe
is
close
to
trough
levels.
We
view
its
current
performance
weakness
relative
to
the
industry
as
cyclical
and
operational
–
new
designer
Daniel
Lee’s
collections
were
launched
at
a
premium
price
point
that
increasingly
price-sensitive
consumers
didn’t
accept.
We
believe
Burberry’s
performance
can
be
improved
by
strengthening
less-expensive
assortments,
which
the
company
is
doing.
Key
Morningstar
Metrics
for Swatch
Group
• Fair
Value
Estimate:
CHF
368.00
•
Morningstar
Rating:
5
stars
•
Morningstar
Uncertainty
Rating:
Medium
•
Economic
Moat:
Narrow
Swatch
benefits
from
a
narrow
moat
through
brand
intangible
assets
and
manufacturing
scale.
Its
valuation
is
very
appealing
as
tailwinds
are
not
priced
in.
Notably,
Swatch
should
benefit
from
high
exposure
to
Chinese
consumption,
which
we
expect
to
recover
strongly
thanks
to
post-pandemic
pent-up
demand
and
long-term
income
growth.
Swatch
should
also
benefit
from
the
bottoming
out
of
lower-priced
watches
and
smartwatches
–
a
competitive
threat
–
gets
closer
to
reaching
maturity,
as
well
as
from
significant
operating
leverage
from
cost
cuts
and
automation.
Key
Morningstar
Metrics
for
Hugo
Boss
• Fair
Value
Estimate:
€62.00
•
Morningstar
Rating:
4
stars
•
Morningstar
Uncertainty
Rating:
Medium
•
Economic
Moat:
Narrow
Hugo
Boss
owes
its
narrow
moat
to
its
strong
brand
in
premium
menswear,
which
tends
to
cultivate
brand
loyalty.
Further,
in
recent
years
its
sales
growth
was
at
the
top
end
of
luxury
peers
thanks
to
increased
marketing,
and
better
traction
in
casual
wear
and
with
young
consumers.
While
we
concede
that
the
apparel
segment
in
luxury
is
one
of
the
most
competitive
and
slower
growing,
we
have
already
incorporated
slowdown
in
our
forecast
and
still
view
shares
as
attractive,
trading
at
only
11
times
forward
earnings.
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