Hermes – Buy Today and Hold Forever
This is what a generational buying opportunity looks like!
Few asset classes reward the long-term investor quite like luxury. And I don’t mean the products themselves, though a Birkin bought a decade ago would have outperformed most equity portfolios. I mean the shares of the great luxury houses – the luxury goods sector is one of the most structurally compelling places a long-term investor can allocate capital.
You see, the luxury goods sector occupies a position in the global economy that is almost without parallel. These companies – Hermes, Louis Vuitton, Tiffany, Rolex, etc. – have spent decades, most often centuries, building brand identities so deeply embedded in culture and aspiration that competition becomes nearly meaningless. Nobody is disrupting Hermès. No startup is threatening Rolex. The moat isn’t a factory or a patent; it’s mythology, and mythology only deepens with time.
What flows from that moat is pricing power of the rarest kind. Luxury brands raise prices not despite their customers, but almost because of them. Exclusivity and aspiration are the product, and a higher price tag often reinforces rather than undermines demand. This dynamic makes the sector uniquely insulated from the cost pressures and margin erosion that plague ordinary consumer businesses, producing the kind of fat, durable margins that long-term investors dream about.
Then there is the demand picture. The secular growth of global wealth, particularly the ongoing expansion of the affluent class across Asia, India, and Latin America, means the customer base for luxury goods is structurally widening, year after year, decade after decade. This isn’t cyclical noise; it’s a structural tailwind that quietly compounds in the background, regardless of short-term economic turbulence.
And crucially, unlike technology or retail, luxury is a sector where disruption is not a meaningful risk. No algorithm or AI replaces the heritage of a Patek Philippe. No platform erodes the desirability of a Birkin bag. If anything, the digital age has accelerated luxury’s reach, giving these brands global audiences without surrendering an ounce of exclusivity. This immunity to disruption transforms what is already a structurally powerful sector into something rarer still: a reliable one. Investors can underwrite these businesses with a confidence that is simply unavailable in most other corners of the market.
And these structural strengths flow directly and visibly into the financials. Luxury’s best businesses routinely post operating margins that most industries can only envy, convert an exceptional share of those earnings into free cash flow given their relatively modest capital requirements, and carry balance sheets strong enough to fund growth, weather downturns, and return capital to shareholders. The economics, in short, reflect exactly what the business model promises.
Put it all together, and what you have is a sector defined by businesses that face virtually no competitive threat, can charge what they like, and are selling into an ever-growing pool of wealthy consumers. For a long-term investor, that combination is extraordinarily rare and extraordinarily valuable.
It is precisely this combination that makes luxury goods home to some of the most powerful compounders the market has ever produced. When a business can reinvest its abundant free cash flow at high rates of return, year after year, protected by a moat that strengthens rather than erodes with time, the mathematics of compounding become almost unfair.
Wealth begets brand; brand begets pricing power; pricing power begets cash flow; cash flow begets more wealth. It is a self-reinforcing loop that rewards patience above all else.
This is exactly why long-term investors have found the luxury sector to be one of the most rewarding places in the entire market, and why any period of share price weakness has offered some of the most compelling long-term buy opportunities, despite the hefty premiums these market leaders command.
And at the very top tier of this industry sits only one company above all others – Hermès
Hermès is not simply a great luxury business. It is the purest, most concentrated expression of everything that makes luxury investing compelling, every quality that makes the sector attractive, existing in its most potent form, with none of the dilution, compromise, or conglomerate complexity that characterizes most of its rivals.
Hermes is simply as good as it gets for the long-term investor.
And yet, Hermès shares have underperformed significantly over recent months. The market has grown nervous about China, the luxury-cycle timing, and whether the premium the stock commands is still warranted when growth moderates even slightly. These are not unreasonable concerns. But they are, I will argue, concerns that fundamentally misread what kind of business Hermès actually is.
This drawdown is driven by an extremely short-sighted market, with shares selling off amid near-term concerns, ignoring the sheer quality and durability of the business. And that gives long-term oriented investors an extremely rare opportunity to buy shares of one of the best and most durable businesses in the world, with Hermes shares now down 10% over the last three years, 24% over the past year, and trading at multiples last seen in early 2020 amid the COVID-driven sell-off.
Meanwhile, Hermès continues to grow strongly, far outperforms peers, maintains a fortress balance sheet, delivers sublime reinvestment metrics, and does all of it without acquiring, discounting, or compromising a single element of the brand that has made it untouchable for nearly two centuries, and which will allow it to continue compounding at a strong rate for decades to come.
Short-term headwinds don’t change that – fundamentals have not changed. Only the share price has.
This is what a generational buying opportunity looks like.
Let me explain why.
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A quick explanation of Hermès!
Hermès International is a French luxury goods house founded in 1837 by Thierry Hermès as a harness and saddlery workshop in Paris. Nearly two centuries later, Hermes sits at the absolute apex of the luxury hierarchy. Not merely premium, not even super-premium, but in a category that has no real ceiling and no meaningful competition at its level. Meanwhile, it remains one of the most coveted and financially formidable luxury businesses on the planet, still family-controlled, still resolutely independent, and still operating with a craft-first philosophy.
The business is built around an exceptionally broad product universe, spanning leather goods and saddlery, silk and textiles, ready-to-wear, perfume, watches, jewelry, and homeware. Leather goods, most famously the Birkin and Kelly bags, represent the commercial heartbeat of the group, consistently generating the largest share of revenues and generating the majority of profits.
The key differentiation for Hermès compared to its peers is that the overwhelming majority of its products are produced by artisans in France, in Hermès-owned ateliers, using raw materials sourced and often processed in-house, which, above all, creates incredible handcrafted quality and true scarcity, which is the heart of the business model.
You see, luxury is all about scarcity and price. The less available something is, the more desirable it becomes. The more desirable it becomes, the more you can charge for it. And the more you charge for it, the more exclusive it feels. However, most luxury companies, including LVMH, face a constant tension between growing revenues and protecting this exclusivity. Push volume too hard, and the brand begins to feel accessible, eroding the very desirability that justified the price premium in the first place.
Hermès barely faces this tension through its production model. Because every product is handcrafted by trained artisans in French ateliers, supply is genuinely constrained by the pace at which skilled craftspeople can be trained and retained. This is not artificial scarcity manufactured through marketing; it is a physical limitation baked into the operating model itself, and it functions as an automatic volume governor that simultaneously protects margins and sustains desirability.
Hermès never faces the inventory surplus problem that periodically forces other luxury brands to discount or use off-price channels – the price of a Birkin has only ever moved in one direction. This price trajectory, sustained over decades, has turned Hermès’s most iconic products into stores of value that compete not just with other luxury goods but with art, watches, and alternative assets as a category. The secondary market for Birkins is liquid, global, and consistently prices the bags at premiums over retail, a phenomenon with no parallel in consumer goods and very few parallels in any asset class.
In other words, the key to Hermes’ success is the unequaled scarcity and desirability of a brand built over centuries. You can’t compete with that – Hermes is in an entirely different league than a Louis Vuitton or Dior.
By estimate, only 70,000 to 120,000 Birkin bags are produced per year. And that might sound like a large number, but that changes when put against the scale of global demand. For reference, there are an estimated 20 million ultra-high-net-worth individuals globally, and the Birkin occupies a position of such universal cultural cachet within that population that the effective demand pool dwarfs production by an almost incomprehensible margin.
The waiting list for a Birkin bag is years-long, and without an established purchase history with Hermès for other products, it might be out of reach for even the wealthiest individuals. You see, Hermès does not take your name, give you a number, and call you when your bag is ready. Allocation of the most coveted bags is understood to be linked, formally or informally, to a client’s purchase history across the full range of Hermès categories. A client who has spent substantially across scarves, homeware, jewelry, perfume, and ready-to-wear, and who has cultivated a genuine relationship with a specific store and sales associate over time, is meaningfully more likely to be offered the opportunity to purchase a Birkin or Kelly than a client who walks in with no history and simply asks for one.
That is one heck of a commercial strategy and a scarcity management tool. That is saying, “first buy our other products and show loyalty, and maybe you’ll get the opportunity to buy a Birkin or Kelly at some point”.
And Hermès sells almost exclusively through its own directly operated stores, with no meaningful wholesale, no department-store concessions, and no licensed third-party retail that could dilute the brand experience or undermine pricing discipline. Every transaction happens on Hermès’s terms, in an environment Hermès has designed, at a price Hermès has set. There is no wholesale discount, no promotional calendar driven by someone else’s inventory problem, and no retailer taking a cut.
That is scarcity and desirability to the next level, and the model that makes Hermès unmatched.
Apart from this sublime business model and unmatched brand, which already make it a fabulous compounder and a superior pick in the luxury industry, Hermès has another huge advantage: its ownership structure.
Up to this day, the Hermès family retains majority control of the group through a holding structure that has successfully repelled every attempt at external consolidation. The family still owns 66-67% of shares, with voting rights that are even more concentrated due to the double voting rights attached to long-held shares.
And this is hugely important for several reasons. Above all, this means that the company operates on a multi-generational time horizon, prioritizing craftsmanship, scarcity, and brand integrity over quarterly volume targets. There are no quarterly earnings pressures driving short-term volume decisions, no activist shareholders pushing for margin expansion at the cost of brand integrity, and no conglomerate parent allocating capital away from the core business toward lower-quality acquisitions.
Artistic Director Nadège Vanhée and CEO Axel Dumas, a sixth-generation family member, continue to steward the house in their tradition – the alignment between ownership incentives and long-term value creation is sensational.
Management can and does make decisions that would be difficult to justify to an impatient shareholder base, but are obviously correct when viewed over a decade.
Hermès has never made a transformative acquisition because the family has no incentive to deploy capital for its own sake. The balance sheet carries net cash, the dividend policy is conservative and sustainable, and excess capital is returned to shareholders through special dividends rather than squandered on empire-building.
The Hermès family has demonstrated across nearly two centuries that they will not compromise the brand for short-term commercial gain. They did not flood the market with product when demand surged. They did not license the brand aggressively to generate royalty income at the cost of exclusivity, as so many luxury houses did in the 1980s and 1990s. They did not pursue accessible price points or diffusion lines that would have broadened the customer base at the cost of the mystique that makes the core product command the prices it does. Every one of those decisions cost short-term revenue and was obviously correct in the long term, and every one of them was possible only because the people making the decision were not accountable to a shareholder base demanding quarterly growth.
This aspect might be the primary driver of my bullishness. It is for sure the reason Hermès is today the pinnacle of luxury and has consistently outpaced all its peers.
Subsequently, Hermès is also financially in a category of its own. The group has compounded revenues at a low double-digit rate over the past decade, and with only a single year of negative growth since 2007, driven by its targeting of ultra-high-worth individuals, which nearly entirely isolates it from cyclicality. Furthermore, it sustains a recurring operating margin above 40%, the balance sheet carries net cash, capital allocation is conservative and disciplined, and free cash flow conversion is consistently strong.
And none of this has come through acquisitions, brand extensions, and volume-chasing. Every percentage point of margin at Hermès is earned through genuine pricing power and operating discipline rather than financial engineering.
Because demand structurally and consistently exceeds supply, Hermès has essentially unlimited pricing power. Clients absorb price hikes without meaningful resistance because the alternative, losing access to the relationship and potentially to the waiting list, is a worse outcome than paying more.
Ultimately, Hermès has the strongest brand, the most defensible production model, the most aligned ownership structure, the best financial profile, and the most resilient demand base in the entire luxury sector.
That is not a business model — it is an institution, and one in a position to keep compounding for decades, with extremely little risk of lasting disruption. That is exactly why any period of valuation disconnect has proven to be a brilliant buying opportunity.
Performance & Financial Review
Last week, Hermès published its first-quarter sales results (Hermès only reports earnings every 6 months), which, plainly, fell short of expectations amid disruption from the Middle East conflict and softening demand in China, given a high comparable base.
Honestly, this isn’t much of a surprise, considering the company has had to close stores in several Middle Eastern countries and has seen traffic from wealthy Middle Eastern individuals decline sharply. This was always going to be a short-term drag on growth, even for Hermes, so the lesser growth was expected.
Nonetheless, the market butchered shares in the following trading session, with Hermes shares initially losing 14% of their value, closing the day down roughly 8%, even as shares were already down double digits YTD, with markets pricing in such headwinds. The share price reaction didn’t make much sense to me, given that Hermes delivered very strong results overall, especially compared with peers such as Kering and LVMH.
Let’s break down the numbers.
Hermes delivered Q1 revenue of €4.1 billion, reflecting a 6% YoY increase at constant exchange rates or a 1% decline reported, with the company facing a heavy negative FX impact of €300 million. However, I think investors are best off focusing on FX-neutral results to get a good sense of business performance. Still, the 6% growth in Q1 was a considerable deceleration from 10% in Q4, driven by the aforementioned tough YoY comparison and a drag from the Middle East conflict in March.
You see, through January and February, management indicated that group revenue was up in the double digits, only to slow once the Middle East conflict broke out in March.
I mean, how clearly do you need it? Hermes was seeing excellent growth through the first two months of the quarter, only for the conflict to slow it down due to temporary closures, resulting in an estimated 150 bps drag on growth. What this clearly tells me is that the business itself is firing on all cylinders, even as it is lapping excellent growth in 2024 and 2025, especially in China. The conflict is a temporary headwind, not a fundamental or lasting issue.
In other words, there is nothing wrong with the business that drives the slowdown. And I think that is the most important takeaway. Also, Hermes performed considerably better than Kering (flat YoY) and LVMH (up 1% YoY).
In fact, regions least affected by the conflict still delivered double-digit growth in Q1, despite the slowdown in tourism.
Revenue in Japan was up 10% YoY, driven by strong footfall and customer loyalty.
Americas growth was up a blinding 17% YoY.
Europe (ex-France) was up 10% YoY, with strong local demand offsetting weak tourist numbers; tourism accounts for more than 50% of sales in Europe, so notable strength there.
Revenue in France was down 3% YoY, primarily due to the conflict in the Middle East. Tourism also accounts for roughly 50% of sales in France, but this sees outsized exposure to Middle-Eastern clients, which means the impact here was more considerable.
Revenue from other, which primarily consists of the Middle East, was down 6% YoY, impacted by store closures, offsetting a strong first two months.
Finally, revenue in Asia (ex-Japan) was up 2% YoY, driven by loyalty from local clients. Greater China, which accounts for the majority of the region, saw slight growth, which was a bit disappointing. But it is worth noting that Hermes delivered outsized growth here in 2024 and 2025, well ahead of peers and the market, making it a tough comparison. Yet, accounting for 42% of revenue, the slowdown here was a small drag, and likely will remain that way throughout 2026, with a growth normalization in 2027.
Looking at performance by segment, leather goods and saddlery continue to perform very strongly, with revenue growing 9% YoY in Q1. This is where scarcity and desirability are the highest, so it is no surprise that this is holding the best. Also, while Hermes and LVMH/Kering results aren’t easily comparable as a group, what does highlight Hermes’ resilience is the fact that its leather goods and saddlery business grew 9% YoY, while LVMH’s leather goods segment (which includes Louis Vuitton) saw revenue contract 2% YoY and Kering by 3%.
So, really a testimony to resilience and demand right there.
Meanwhile, silk and textiles were up 8% YoY, driven by continually renewed creativity across both the women’s and men’s collections. Perfume and beauty were stable YoY; watches lost 4% YoY in a challenging environment; other divisions were up 7% YoY; and ready-to-wear was roughly flat.
Now, Hermes doesn’t provide earnings in their Q1 trading update, so this is all we have, but I absolutely wasn’t shocked by the sales results. Sure, growth slowed in part due to Asia, but in most regions, performance held up well, and commentary suggests this weakness isn’t here to stay. In a challenging environment, Hermes delivered a decent Q1.
To still assess its bottom line, I want to quickly review the 2025 results as well.
Hermes delivered 2025 revenue of €16 billion, up a healthy 9% YoY, despite lapping sensational growth in prior years and dealing with economic and geopolitical uncertainty. This was driven by a strong performance in most segments, apart from Perfume and Beauty and Watches, and growth in every region!
By region, France grew by 9%, Europe by 11%, Japan by 14%, the Americas by 12%, Asia by 5%, and Other by 15%, so really excellent growth across the board. And that is no different across segments. Leather goods revenue was up 13% YoY, Ready-to-wear up 6%, silk and textile up 5%, and other up 11%. The only drag came from Parfume and Beauty and watches, down 8% and 2%, respectively. On the positive side, these account for only 7% of revenue, so the drag wasn’t too big.
Let’s then assess the P&L!
Hermes reported a 2025 gross margin of 71.1%, up 80 bps YoY, with the negative impact from currency hedging offset by an accretive conversion impact, pricing, and improved sell-through. Unsurprisingly, the actual input cost to make these $10,000 bags or silk scarves worth thousands isn’t that high, so Hermes is able to deliver very strong gross margins, although these haven’t expanded much over recent years, remaining consistently in the low-70s.
Moving further down the line, total operating costs in 2025 were up just under 6% YoY, growing more slowly than revenue, translating into healthy operating leverage and margin expansion. Obviously, one of the highest costs for Hermes is SG&A, with most of this going to personnel. SG&A amounted to €3.1 billion in 2025, up 5% YoY, driven by increased staff in stores and 1,300 new hires.
In addition, communication and marketing costs were flat at €620 million YoY and accounted for just 3.9% of sales, with Hermes obviously not needing much marketing given its brand strength.
Ultimately, this translated into an operating income of €6.6 billion, up 7% YoY, outgrowing reported sales growth of 5.5% (including a 340 bps FX headwind). This translated into a recurring operating margin of 41%, up 50 bps YoY.
Ultimately, this led to a net income of €4.5 billion, including the exceptional contribution from the profits of large companies in France. Correcting for this, Hermes delivered a net income margin of 30.3%, flat YoY.
Rounding up the results with cash flows, Hermes spent €1.2 billion on operational investments in 2025, which equals Capex, up 9% YoY and outpacing reported revenue. This was allocated toward the ramp-up of production and to secure the supply chain, including leather workshops in France, the upstream silk, metals, and houseware division, and real estate.
Ultimately, this translated into an FCF of €3.9 billion, reflecting a FCF margin of 24.3%, down 50 bps due to higher Capex to fuel long-term growth. Nonetheless, this is an excellent FCF margin.
This nearly €4 billion in 2025 FCF easily covered Hermes’ dividend obligation of €2.8 billion. Shares now yield roughly 1.3% following the sell-off, the highest yield in over a decade. Furthermore, this remains well covered by a 42% payout ratio, so quite a compelling and sustainable setup.
In addition to fully covering the dividend, the strong 2025 FCF also allowed management to keep strengthening the balance sheet, which is an absolute fortress. Hermes ended the year with €12.2 billion in cash and practically no debt on the balance sheet, which is just exceptional. And that is after the company already paid special dividends in 2023 and 2024 to return more cash to shareholders.
This is a capital-light company that consistently generates substantial cash, is gradually expanding margins, and sits on a large net cash position. Sublime.
And as if that wasn’t compelling enough already, Hermes also consistently delivers sensational reinvestment metrics. LTM ROE sits at 25%, down from peak levels in 2021-2023, but still very strong. The same goes for an ROIC of 32%, which is similarly impressive, even as it’s down from peak levels.
This highlights that Hermès is not merely a great brand — it is a great business in the most financially precise sense of the term. Every euro reinvested into the model generates great returns well ahead of the cost of capital, compounding shareholder value not through financial engineering or leverage but through the simple and powerful mechanism of deploying capital into a business whose underlying economics are structurally superior to almost anything else available in public markets.
This isn’t just a great business model and brand, but also a well-managed business in perfect financial health.
On that note, let’s jump into the outlook next!
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Outlook & Valuation
Usually, I would start off with management’s guidance, but since Hermes doesn’t provide concrete guidance, there isn’t much to go on. The bit of guidance management does provide is the following:
“In the medium-term, despite the economic, geopolitical and monetary uncertainties around the world, the group confirms an ambitious goal for revenue growth at constant exchange rates.”
This suggests that management continues to target a growth rate in line with the last decade, so in the high-single-digit to low-double-digit range for the foreseeable future. And looking at the underlying dynamics, current momentum, and the state of the business and the luxury industry, I think that is a fair estimate.
There are plenty of factors to drive high-single-digit to low-double-digit growth for Hermes over the next 10 years.
Most importantly, there is pricing power. Hermès has demonstrated that it can raise prices consistently and substantially without causing meaningful demand destruction. Hermes has communicated that it aims not to raise prices much above the growth in input costs, but that still amounts to a mid-single-digit percentage per year, driven solely by price hikes. Historically, price increases in the mid-single digits have been absorbed without complaint by a client base for whom the absolute price level is essentially irrelevant. That won’t change, and already bakes in a perpetual mid-single-digit growth rate.
Second up, the secular expansion of global wealth, especially the ultra-high end. The population of individuals with the financial means and cultural inclination to be Hermès clients has grown substantially over the past two decades and shows no structural signs of plateauing. Especially in countries like China, India, and the Gulf region, wealth creation continues to add new cohorts of potential clients to the addressable market. Crucially, as wealth accumulates across generations in these markets, the cultural relationship with luxury deepens and becomes more sophisticated, which tends to shift spending upmarket toward houses like Hermès that sit at the absolute apex of the hierarchy.
This means Hermes can gradually expand production capacity without risking oversupply, as the number of potential customers will also continue to grow solidly. I think this should allow for low-to-mid single-digit volume growth per year, which already puts us at least at a high single-digit growth rate, with room to reach double digits.
And there are more levers to pull. Geographic expansion remains one. Hermes’ global store footprint remains minimal. Over time and with caution, it could expand its presence in large cities, making it easier to purchase Hermes products and driving sales, while adding brand presence (planting seeds).
Additionally, there is product category expansion. Hermès has historically been disciplined about entering new categories — it does not chase adjacencies simply because it could plausibly sell them under the brand name. But within that discipline, there is a credible runway for continued development in watches, jewelry, and homeware, all of which have meaningfully increased their revenue contributions over the past decade and remain underpenetrated relative to the leather goods core. There is plenty of room to run there as well.
Taking these factors into account as well, I can see a clear runway for Hermes to deliver low-double-digit growth once more over the next decade, say an 8-12% range. Furthermore, earnings growth could reasonably exceed revenue growth by one to two percentage points annually, given continued operating leverage, implying a realistic earnings CAGR in the 9 to 14% range over the period.
More concretely, I now expect just over 7% revenue growth in 2026, which assumes the Middle East disruption will last through Q2 but ease in the second half of the year. Management already indicated an improvement in sales in the first few weeks of April, so the impact should be contained. At the same time, growth in Asia will likely be subdued throughout the year, with the region now expected to grow 3-4% due to a tough comparison. On the bottom line, I expect some cost pressure from optimistic investments in personnel and higher input and transportation costs, leading to margin pressure and limited EPS growth of 6%.
However, I expect growth to rebound in 2027 and stabilize afterward, helped by easier comparisons and easing geopolitical and macro headwinds, with growth in Asia rebounding as well. On the bottom line, I also expect a strong recovery in 2027 and stabilizing growth after, driven by easing costs and a strong top-line performance.
These assumptions are all accounted for in the financial model below.
That brings me to valuation, and this is where it gets really interesting. As alluded to before, Hermès shares have gone practically nowhere over the past three years, mostly due to the sell-off YTD, leaving them down 22% in 2026 and 45% below the early 2025 all-time high, and honestly, without real justification.
Sure, the company is facing some near-term headwinds, and the luxury industry is coming out of a challenging period, with a recovery still slow, but Hermes’ performance has been excellent to date. The company continues to far outpace peers and deliver strong results, especially when we look through near-term disruptions. Furthermore, margins continue to expand, cash flows are excellent, the balance sheet is a fortress, and reinvestment metrics are sublime. And above all, the brand remains as strong as ever, and the business model is firing on all cylinders.
While facing near-term headwinds that will make 2026 challenging, the long-term thesis is still strong. I still expect strong demand for luxury goods over the next decade, especially as the number of ultra-wealthy individuals grows rapidly, which will further drive demand toward ultra-luxury brands such as Hermès. Hermès simply remains in a great spot to deliver excellent growth over the next decade or two – nothing has changed there.
And that makes the slump in share price the more compelling. As projections have held up, the multiple one has to pay for Hermès shares has contracted significantly to the lowest level since the March 2020 Covid-driven sell-off. Shares have recovered some of these losses over the past week, but at a current price of roughly €1,648, shares still trade at:
35x 2026 earnings, far below the 50x at which shares entered the year and the 48x it has traded at on average over the past 5 years.
30x 2026 FCF.
The current dividend yield is also 55% higher than the 5-year average.
While a 35x earnings multiple is in no way cheap, it is important to contextualize what that multiple is buying. Hermès is not a business that deserves to be valued like a typical consumer company, or even a typical luxury company. It is a business with structural pricing power that has no practical ceiling, a demand base that is almost entirely decoupled from the economic cycle, a production model that cannot be disrupted or replicated, and a family ownership structure that guarantees the long-term integrity of every quality that justifies the premium in the first place.
You are practically buying one of the most reliable compounders on the planet for the next two or three decades that faces no risk of disruption, period. For the handful of businesses that are this fundamentally strong, a structural premium to everything else is easily justified.
Therefore, the question is never whether Hermès is cheap in absolute terms. The question is whether the current multiple fairly reflects the quality and durability of what you are buying.
Viewed through that lens, Hermès shares are anything but expensive at 35x earnings and just 30x FCF, which is a remarkable multiple for this kind of quality. Current multiples are a clear discount to the average multiple the stock has commanded in recent years, and I expect it can return to that level once sentiment improves and headwinds ease – historically it has every single time.
So, let’s be conservative and assume a 42x earnings 2028 exit multiple, which is a solid discount to historical averages and only assumes partial repricing, which is anything but a stretch. If I take that multiple and my current 2028 EPS estimate, I calculate an end-of-2028 target price of €2,470. Based on a current share price of around €1,650, this implies potential annualized returns of over 17%, including dividends, despite a fair degree of caution.
In my view, that reflects a highly compelling risk-reward and a rare opportunity to own one of the world’s greatest compounding machines at a discount to fair value, with a good likelihood of market-beating returns.
A generational opportunity? I think it is.
Buy it today and don’t look back for a decade or two.
Rating + fair value: Strong Buy - Accumulate below €1,750
2029 Target Price: €2,470
Implied CAGR from current price: ~17%
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Well written, Daan (as always)! There’s no doubt that Hermès is a high-quality company. However, we believe there are more attractive investment opportunities available. From an opportunity cost perspective, we would prefer to allocate capital elsewhere.
Interesting.