Investing.com -- Bank of America raised its rating on LVMH shares to Buy from Neutral, adding the stock to its Europe 1 list of top ideas.
The firm also hiked its price targets on LVMH stock to €735/US$150, up from €700/US$156, implying 13 and 15% upside potential, respectively.
LVMH shares surged 8% in European trading Thursday.
The upgrade comes following a challenging period for the luxury sector, with LVMH experiencing one of its toughest years in the past decade. Nevertheless, BofA notes an improvement in trends since the third quarter and anticipates controlled cost growth by 2025.
A favorable shift in foreign exchange (FX) rates is also expected to transition from a headwind to a tailwind for the company.
“As such, the EPS downgrade cycle has paused,” the bank’s analysts added.
LVMH stock is trading at 23 times its projected 2025 price-to-earnings (P/E) ratio, which analysts describe as a mid-cycle valuation based on earnings at the low point of the cycle.
“Any evidence of a reacceleration in revenues should result in a P/E re-rating towards the top end of the historical valuation range, as it has at other turning points in the cycle,” they explained.
BofA highlights that the company’s Fashion & Leather (F&L) revenue is showing signs of recovery after a 5% dip in the third quarter of 2024. The fourth quarter of 2024 is projected to be better, with moderate growth expected in 2025. Early indications of a resurgence in American luxury demand and potential stimulus in China could further support a rebound.
The firm also commends LVMH's strategic emphasis on innovation and the revival of popular collections, such as the Murakami edition at Louis Vuitton, which saw overwhelming pre-sale demand. Moreover, new products are being introduced at accessible price points, while also enhancing the prestige of individual product lines.
In terms of cost management, LVMH is expected to aim for very low-cost growth in 2025, assisted by rent reductions in China and a stable advertising budget. The strength of the US dollar should also contribute to margin improvements.
“Consensus models more limited margin expansion at F&L than 11 of 14 other luxury companies in the sector,” analysts continued.
“We think that we are close the to the end of the earnings downgrade cycle on LVMH. Additional valuation support should come when confidence over top line improves.”
BofA has increased its 2025 EBIT forecast for LVMH by 1% based on foreign exchange considerations and raised EPS projections by 6% after excluding a French tax proposal. However, the firm has reduced its organic growth estimates for 2026-2027 due to the current lack of visibility on the sector's recovery.
In a separate note, BofA also upgraded Ermenegildo Zegna NV (NYSE:ZGN) stock to a Buy rating with a price objective of $8.90, representing a 17% potential upside.
Analysts stressed that Zegna remains "one of the more undervalued stories in luxury."
They attribute this to the market’s complacency regarding key factors, including the reduced reliance on China and Asia due to a shift in geographic revenue mix, the Zegna brand's outperformance in developed markets despite challenging conditions, and the group’s strategic efforts to address underperforming smaller brands.
"Going into 2025, Zegna Group should see sequential acceleration in its organic growth profile which has already started to come through in 4Q, leaving the worst behind," the bank's team added.