Hermes Continues Delivering Stellar Results; FVE Increased, but Shares Still Expensive

We increase our fair value estimate for wide-moat Hermes to EUR 990 per share from EUR 700 per share, following another set of stellar annual results. Our fair value increase stems from higher than previously expected growth in 2023 thanks to strong price increases (5%-10% globally with 7% on average, compared with low- to mid-single-digit increases annually over the past few years). We also expect higher long-term sustainable profitability for the firm, with an operating margin around 40% (similar to that delivered in 2022 thanks to exceptionally strong capacity utilization and fixed-cost leverage even as gross margin came under pressure a bit). Further, we increase our phase II growth rate to 8% from 7% and our phase II return on new invested capital from 60% to 70% to reflect our confidence in the superior longevity of Hermes’ brand appeal, strength of execution, and pricing power. Despite the fair value increase, Hermes shares still trade in overvalued territory in our view.