In a market phase of profound uncertainty like the current one, investors are demonstrating a particular interest in luxury sector stocks. Especially for the most important names but for some important listed Italian companies such as Moncler, Ferragamo and Ferrari. Indeed, they like their ability to maintain high margins thanks to the strength of customer demand for their exclusive products. This market benevolence is even more evident after the announcement of strong earnings data in the first quarter of 2023.
Italy at the top in the world of luxury
Moncler is showing that it is benefiting from the good momentum in the sector. Moncler’s first quarter 2023 revenues beat expectations. In particular, the turnover before the contribution of Stone Island amounted to 604.9 million euros, up by 27.8% on an annual basis. According to some analysts “Local feedback in China suggests that the recovery in luxury goods spending is on the right track and Moncler is in a position to evaluate new M&A options”.
However, some uncertainty is affecting the luxury group Salvatore Ferragamo. In the first quarter of 2023, revenues amounted to 278 million euros, down by 4% (-6.5% at constant exchange rates). The performance reflects the 2.3% drop in retail sales (-2.4% excluding the exchange rate effect), to 191 million. As explained by the Florentine company, “the drop was conditioned by the slowdown of the US market, against a positive performance in EMEA and a progressively improving trend in China“.
Ferrari too moved in the first four months of the year in line with the strength of the luxury sector, reaching an all-time high on the Stock Exchange. “Another exceptional quarter for Ferrari, with double-digit growth in key metrics, a new record EBITDA margin of 37.6% and net income of €297m,” commented Benedetto Vigna, CEO of Ferrari. “Our order book extends to 2025, thanks to a range of products that has won important awards”.
Where does the strength of the brands come from?
Margins of the major brands remain high, reflecting the resilience of demand for their durable products and the strength of their operating and financial models. This is what industry experts explain, according to which competitive advantage allows the most important luxury companies to produce higher returns on invested capital than their competitors for long periods of time.
In essence, top luxury brands benefit from strong pricing power: even though consumer confidence has waned, the significant price increases of iconic luxury products have not had a major effect on demand. This dynamic reflects competitors’ difficulty in challenging the traditions that underlie the appeal of many of the most important luxury products.
Another important growth driver is China. The end of the zero-Covid policy has been a strong boost for some luxury companies particularly exposed to the Chinese market, which have recently recorded excellent results. For these companies, Chinese consumers are offsetting early signs of a slowdown in the United States. Finally, the slowdown in inflation and the consequent easing of pressures on the supply chain may also bode well for the future trend in interest rates.
New Cash Collects with guaranteed coupon flow every month
An alternative way to invest in the aforementioned securities is to use the Investment Certificates such as the new Cash Collect Callable Fixed Premiums on equity baskets recently issued by BNP Paribas on the SeDeX market of Borsa Italiana. The new products, with a three-year duration (with expiry on 26 May 2026), envisage a fixed monthly premium between 0.70% and 1.45%, regardless of the performance of the underlyings that make up the basket.
The new Certificates therefore combine a guaranteed fixed premium with the possibility of early recall at the option of the Issuer. Therefore, both the fixed monthly premiums and the early repayment option are not linked to the performance of the underlying. Furthermore, investors may consider this issue as an attractive solution to diversify their portfolio by investing in equities from different sectors, such as the luxury sector, banking, insurance, energy, travel or technology.
The Certificate on the big names in Italian luxury
The new range also includes the Certificate on some Italian luxury stocks. This is the product on Moncler, Ferragamo and Ferrari (ISIN NLBNPIT1Q6J1) which pays a fixed premium of 0.70 euro of the Notional amount on a monthly basis, regardless of the performance of the underlyings. Starting from the ninth month, the Issuer (BNP Paribas) has the option of exercising the Early Redemption option: in this case the Certificate matures in advance and pays, in addition to the monthly premium, the notional amount (100 euro). Conversely, if the Issuer does not exercise the Early Redemption option, the Certificate pays a premium of €0.82 until its natural maturity.
At maturity, if the listing of all the securities making up the basket is greater than or equal to the Barrier Level, the Certificate expires and pays, in addition to the monthly premium, the notional amount (100 euros). If the price of at least one of the underlyings is instead lower than the Barrier Level (50% of the initial value of the underlyings), the Certificate expires and pays a premium of 0.82 euro, plus an amount commensurate with the performance of the worst of the underlyings, with consequent partial or total loss of the Notional Amount.
The novelty of the “Callable” option
An important novelty that characterizes this issue is the possibility for investors to receive an early redemption of the Certificate at 100% of the Notional Amount starting from the ninth month: from 23 February 2024, in fact, on a monthly basis, the Issuer has the right to Early call the Certificate by giving investors at least 3 business days notice.
The investor receives a guaranteed fixed premium at the end of each month, while the possibility of early repayment allows you to benefit from an optimization of the return.
Prevalence of positive judgments among analysts
The consensus gathered by Bloomberg on the three titles in the basket, which we report in the table above, is essentially positive. More than half of the analysts who follow Moncler and Ferrari recommend buying (buy) on these stocks with a small minority suggesting selling (sell). On Ferragamo, on the other hand, there is a prevalence of analysts who recommend keeping the shares in the portfolio (hold) with respect to buy and sell judgments. Furthermore, the 12-month average target price indicates that these stocks currently appear underpriced and from which analysts expect potential upsides within the next 12 months.
This makes the underlyings of the basket suitable for strategies with a Cash Collect Callable Fixed Premium, i.e. for those who have a lateral or moderately bullish view of a given sector (in this case the luxury sector) to obtain an attractive return at the time of natural maturity or advanced at the discretion of the issuer.
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