Tiffany (NYSE:TIF) announced on Nov. 25 that it was selling itself to luxury goods conglomerate LVMH (OTCMKTS:LVMUY) for $16.2 billion. The sale provides Tiffany with the financial backing to move the brand higher up the luxury goods chain and restore the brand to its iconic status in the process.
“Bernard Arnault will be able to invest massively in repositioning the brand, taking it more upmarket in the United States, and also pushing more in Asia and in Europe,” the Globe and Mail reported about Tiffany’s sale to LVMH.
While Tiffany is getting a severe boost joining LVMH, the French luxury goods company will gain an excellent brand to do battle in Asia.
“Tiffany’s brand equity and the strength of the image of its iconic 1837 Blue Box are more valuable than the current financials suggest,” Jefferies analyst Flavio Cereda said in a note. “LVMH can leverage off these to launch a more concerted ‘attack’ on the Asian millennial market.”
The largest M&A transaction in the history of luxury goods, the deal brings the conglomerate back to center stage. Here are 10 of the best-performing conglomerate stocks of the past year.
Compass Diversified Holdings (CODI)
I first became acquainted with Compass Diversified Holdings (NYSE:CODI) back in 2011. Over time, I’ve seen it successfully sell off its some of its middle-market investments after generating significant profits for the company and its shareholders.
The most recent example of a win for the company was its sale of Manitoba Harvest in February to Tilray (NASDAQ:TLRY) for $316 million. Manitoba Harvest is the world’s largest vertically integrated hemp food brand. Compass generated a gain of $122 million on its investment in Manitoba Harvest.
Since going public in 2006, the company has generated more than $1 billion from its middle-market investments. Using those proceeds, it has paid out almost $18.60 in distributions, or nearly 124% of its IPO price.
Year to date, CODI is up 83%, and its annual total return over the past five years is an attractive 11.9%, higher than both its conglomerate peers and total U.S. market.
Brookfield Asset Management (BAM)
Over the past five years, it has generated a five-year annual total return of 12.7%, 714 basis points higher than its asset management peers, and 740 basis points higher than the overall Canadian market. Year to date, it’s up almost 49%.
I included Brookfield in my list of conglomerates because it puts its own capital into deals that it invests on behalf of its limited partners. In March, Brookfield announced that it had acquired 62% of Oaktree Capital Management (NYSE:OAK), the distressed debt investment firm co-founded by famed investor Howard Marks.
As the company states on its website, it invests alongside its limited partners to ensure that Brookfield’s interests are aligned with its investors. In its Q3 2019 report, Brookfield highlighted that 80% of its $45 billion in invested capital is in the company’s listed partnerships and is the largest investor in each of these partnerships.
Frankly, the best days of Brookfield are still ahead of it.
LVMH (LVMH)
LVMH has had a strong run over the past five years, delivering an annual total return of 20.8%, which is significantly higher than the -5.4% return of its luxury goods peers and double the total return of the overall French market. Year to date, it’s got a total return of 47%.
Over the past five years, Bernard Arnault, the company’s CEO and LVMH’s driving force, had grown his net worth by 199% to $100 billion from $33.5 billion in 2014. In 2019 alone, it’s up $31.4 billion.
By paying $135 a share for Tiffany, $15 higher than its initial bid, Arnault is adding to a stable of brands that includes Christian Dior, Dom Perignon, Tag Heuer, Bulgari, and Sephora.
The deal doubles LVMH’s jewelry market share to 18%. More importantly, it is by far the conglomerate’s biggest acquisition in its history. Including the Tiffany deal, it has made 20 deals worth $28 billion since the start of 2016. Not bad for a guy who took $15 million of family money in 1984 and turned into a $100 billion fortune.
The LVMH stock price is high at the moment, but should it come down some in the future. Investors would be wise to jump on board.
Power Corporation (PWCDF)
Power Corporation (OTCMKTS:PWCDF) is having a great year in the markets, up 37.6% year to date through Nov. 22. That’s considerably better than its insurance peers and Canadian stocks in general. Also, its three-year total return of 7.1% is reasonably healthy compared to the same two groups. Unfortunately, the same can’t be said for its five-year total return, which is less than 1%.
Power Corp. is a Montreal-based holding company that has a lot of holdings. However, its most significant piece of the conglomerate puzzle is its 64.1% stake in Power Financial (OTCMKTS:POFNF), which in turn owns 62.1% of asset manager IGM Financial (OTCMKTS:IGIFF) and 66.8% of Canadian life insurer Great-West Lifeco (OTCMKTS:GWLIF).
In addition to owning two of Canada’s largest financial services companies, it has put money into smaller fintech investments, including Wealthsimple (it owns 70%), a Toronto-based robo advisor that operates in Canada, the U.S., and the UK. Serving over 175,000 clients in these three markets, Wealthsimple has more than 4.5 billion CAD in assets under management.
In the third quarter, Power’s adjusted earnings were 78 cents a share, 28% higher than a year earlier. Of its adjusted net earnings, 76% were from its Great-West Lifeco subsidiary.
In the future, expect Wealthsimple to become a bigger part of the Power pie. In the meantime, enjoy its 5.5% dividend yield.
Kering (PPRUY)
One of LVMH’s biggest competitors is Kering (OTCMKTS:PPRUY), the owners of luxury brands such as Gucci, Saint Laurent, Bottega Veneta, Balenciaga, and many others.
In 2019, its total return is 30.5%, better than both its footwear and apparel peers, as well as the total French market. Over five years, it’s got an annual total return of 25.4%.
In 2018, Kering had sales of 13.7 billion euros, 26% higher than in 2017. In terms of operating income, it had 3.9 billion in 2018, 47% higher than a year earlier. Free cash flow, always something I look for in a business, grew by 34% in 2018 to 3 billion euros.
Kering generates 34% of its annual revenue from Asia (excluding Japan), 20% from the U.S., 33% from Europe, 8% from Japan, and 5% from the rest of the world. All regions saw double-digit sales increases in 2018.
Although I prefer LVMH, you can’t help but applaud the work PPRUY has done in recent years to win the spending of luxury consumers.
Icahn Enterprises (IEP)
Billionaire Carl Icahn’s limited partnership Icahn Enterprises LP (NASDAQ:IEP) has a terrible five-year annual total return at -1.5%. However, over the past 15 years, investors would have achieved an annual total return of 11.5%, significantly higher than both its conglomerate peers and U.S. total market. Year to date it’s up 9%.
Icahn Enterprises has significant investments in companies such as Caesars Entertainment (NYSE:CZR) and Newell Brands (NYSE:NWL) as well as operating units in energy, automotive, food packaging, real estate, home fashion, and metals. Together, these businesses had a net asset value (assets and cash less debt) of $7.5 billion at the end of September.
Based on its Nov. 25 share price, it’s trading at 1.7 times its net asset value per share. IEP has paid out $8 in dividends this year and is currently yielding 12.7%, a big incentive to hang in there when its businesses and investments haven’t performed so well, as is the case this year.
Carl Icahn isn’t worth $19.9 billion for nothing.
George Weston (WNGRF)
Heading north of the 49th parallel to Canada, I’ve selected George Weston (OTCMKTS:WNGRF), the holding company controlled by Galen Weston, Canada’s third-wealthiest person at 8.4 billion CAD.
Weston itself owns 52.2% of Loblaw Companies (OTCMKTS:LBLCF), Canada’s largest grocery store chain. It also owns 62.9% of Choice Properties Real Estate Investment Trust (OTCMKTS:PPRQF), Loblaw’s former real estate subsidiary, which it spun-off to Weston in November 2018. Also, Weston operates a large North American baking operation with more than 6,000 employees spread across 40 facilities in Canada and the U.S.
In its most recent Q3 2019 results, Weston had an operating income of 884 million CAD from 15.2 billion CAD in sales. Operating income and sales grew by 10% and 2.4% respectively during the quarter.
Over the past five years, Weston has achieved an annualized total return of -0.4%. While that’s nothing to write home about, its 10-year performance is considerably better when compared to Canadian stock returns over the same period. Year to date, it’s up 24.5%.
Seaboard Corporation (SEB)
Like most conglomerates, Seaboard Corporation (NYSEARCA:SEB) has choppy stock performance. Over the long haul, however, it does perform. Year to date, it’s up 12.3%, while its 15-year total return is an impressive 12.4%, 321 basis points higher than the total U.S. market.
Although Seaboard is based in Merriam, Kansas, it has operations around the world, employing more than 25,000 people generating more than $5 billion in annual sales. Its businesses include Seaboard Foods, a leading pork producer in the U.S., Seaboard Marine, a container shipper between the U.S. and South America, and all points in between; a commodity trading business on three different continents and an Argentinian sugar and alcohol producer.
However, it is the company’s 50% noncontrolling interest in Butterball, the turkey producer and processor, whose brand is best known by Americans. And for last week’s Thanksgiving, a tremendous number of cooked Butterball turkeys were likely served in dining rooms around the country.
In 2018, Seaboard’s sales were $6.6 billion, 13.3% higher than a year earlier. Unfortunately, due to lower pork prices, the company’s operating income fell slightly to $209 million from $240 million a year earlier.
When pork prices come back, look for Seaboard to shine once again.
Loews (L)
Of all the conglomerates on this list, Loews (NYSE:L) is easily the most disappointing of the bunch with a five-year annualized total return of just 3.9%, well below both its property peers, casualty peers, and the U.S. total market. However, on a year to date basis, it’s up 8.4%.
Loews has continued to be hurt by its conglomerate structure. In its October presentation, L points out that its ownership in both CNA Financial (NYSE:CNA), a property and casualty insurance company and Diamond Offshore Drilling (NYSE:DO), along with Loews’ cash and investments is worth $53.13 a share, $2.33 higher than its current share price.
However, the exciting part about this is that this doesn’t include the company’s three non-publicly traded operating subsidiaries: Boardwalk Pipelines, Consolidated Container Company, and Loews Hotels.
Since 2015, it has repurchased 19%, or $3.3 billion, of its stock and retired 44% since 2008. Like Berkshire Hathaway, patient investors will be rewarded by holding Loews stock for the long term.
Berkshire Hathaway (BRK)
Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) has had a decent go of it the past five years, delivering an annual total return of 8.2%, which is 63 basis points better than its insurance peers, but 229 basis points less than the performance of the total U.S. market. Year to date through Nov. 25, it’s up 7.3%, a decent, if not spectacular return.
It’s important to remember that while Warren Buffett’s holding company has continued to deliver lumpy shareholder returns, those who have held Berkshire stock do so because they understand that the sum of the company’s parts is worth more than its current share price.
In August 2019, veteran investor Whitney Tilson valued the company’s Class A shares’ intrinsic value at $392,194, approximately 20% higher than its Nov. 25 closing price. He further suggests that Berkshire is growing its intrinsic value by 6-8% annually, which suggests it is the perfect stock to own in good times and bad.
While most people tend to focus on its insurance businesses, it is the non-insurance income that has grown significantly over the past 15 years, generating even more cash for the conglomerate.
Tilson believes that Berkshire after Buffett will be a lot like Apple (NASDAQ:AAPL) after Steve Jobs. Considering Apple is the company’s largest equity holding, it’s an appropriate comparison.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
