On Monday, Citi updated its financial outlook on Hermes International (OTC:HESAF) (HRMS:FP) (OTC: HESAY (OTC:HESAY)), increasing the price target to EUR2,350 from the previous EUR1,824, while keeping a Neutral rating on the stock. The adjustment comes after reviewing the company's full-year 2023 performance and insights from a recent U.S. roadshow.
The firm anticipates that Hermes will experience double-digit growth in revenue and earnings, thanks to an 8-9% increase in pricing, outpacing its peers who are seeing low single-digit percentage rises.
This growth is expected to be bolstered by solid volume expansion in non-leather categories such as ready-to-wear, watches, and jewelry, which make up approximately 40% of sales. However, leather goods production capacity is projected to remain limited to around a 7% annual increase.
Citi has revised its sales, EBIT, and EPS forecasts for Hermes for the fiscal years 2024 and 2025 upwards by 5%, 5%, and 7% respectively. These revisions largely reflect the company's recent financial results and the anticipation of a strong start to 2024, with first-quarter earnings expected to increase by 13% on a constant currency basis, a figure that Citi considers to be potentially conservative.
Hermes shares have shown significant outperformance year-to-date, with a 19% increase compared to a 10% increase in the luxury sector.
Additionally, over the past five years (2019-2023), Hermes shares have cumulatively outperformed by 170%. The stock's valuation is currently at twice the average of the luxury sector, a premium attributed to Hermes' more defensive business model and its relatively sustainable profile in terms of revenue growth, margins, cash flow, and returns.
The new price target of EUR2,350 reflects Citi's earnings upgrade and discounted cash flow (DCF) update. At this price target, Hermes' stock is trading at approximately 48 times the projected earnings for fiscal year 2025. Despite the positive growth outlook, Citi's neutral stance suggests a cautious approach to the stock's current valuation.
InvestingPro Insights
In light of the recent financial outlook update by Citi on Hermes International, InvestingPro data and tips provide additional insights that may be valuable to investors considering the stock. Hermes is currently trading at a high earnings multiple with a P/E Ratio of 55.85, reflecting its premium status in the market. This aligns with Citi's view on the stock's valuation, which is approximately twice the average of the luxury sector.
InvestingPro Tips highlight that Hermes has raised its dividend for 3 consecutive years and has maintained dividend payments for 31 consecutive years, underscoring the company's commitment to shareholder returns. Additionally, the company's gross profit margins remain impressive at 72.29%, supporting the notion of a strong and sustainable business model.
From a financial health perspective, Hermes holds more cash than debt on its balance sheet, and its liquid assets exceed short term obligations, suggesting a robust financial position. While the stock generally trades with low price volatility, it has seen a strong return over the last three months, with a 26.36% price total return, and over the last six months, with a 42.04% price total return.
For investors seeking a deeper dive into Hermes International, there are additional InvestingPro Tips available at https://www.investing.com/pro/HESAY. Unlock the full potential of your investment decisions and take advantage of a special offer by using the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, which includes 19 more InvestingPro Tips to guide your analysis.
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