Research shows that illiquid stocks tend to perform better over the long term. This is particularly true for companies with a large main shareholder or group of associate shareholders, such as a wealthy family. There are two reasons why this tends to be the case.
Firstly, shareholders who own a large proportion of a firm tend to have a longer-term outlook than individual shareholders, and they are less likely to dump and run when the company misses its quarterly numbers. It’s also far harder to find a buyer for large blocks of stock. It is not a straightforward case of an ordinary investor selling a few thousand shares.
Companies with owner-operators, where the majority investor or investors also call the shots in the day-to-day running of the firm, also tend to make long-term investment decisions. If you want the family to own a business and plan to remain CEO for three or four decades, you can make investment decisions today that will take decades to pay off.
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The average public company’s CEO does not have the same luxury. They know they have to achieve results relatively quickly, within a couple of years at most, or shareholders might get fed up and start pushing for change. Activist investors may also swoop on the business and vote out the CEO or the board. If a family owns 50% of a company, an activist will struggle to build a big enough stake to drive significant change.
LVMH (LVMHF), majority-owned and run by Bernard Arnault and his family, and Berkshire Hathaway (NYSE: BRK/B), still majority-owned by legendary US investor Warren Buffett, are two excellent examples of the above in action. Both companies have been fantastic investments, partly because they can make long-term investment decisions.
Europe is the perfect hunting ground for relatively illiquid, majority family-owned businesses exhibiting the qualities I have outlined above. France has several of these businesses, which tend to fly under the radar as they are often relatively secretive and require some work to dig into. Coverage by analysts is rare and in most cases, only a few thousand shares change hands every month.
Laurent-Perrier (Paris: LPE)
Laurent-Perrier is the perfect example of a relatively illiquid, majority family-owned business. The company is one of the world’s largest Champagne producers and remains majority-owned by its founding family, the de Nonancourt family. Marie-Louise Lanson de Nonancourt bought the Tours-sur-Marne-based Champagne maker that would become Laurent Perrier in 1938. Marie-Louise’s son, Bernard de Nonancourt, took the business over and expanded it. By 2005 it had become the world’s third-biggest seller of Champagne. Today, the de Nonancourt family owns 65% of the shares and 78% of the voting rights.
Champagne producers are an interesting investment opportunity as their product is protected. Buffett has often spoken about why it is essential for a brand to have a “moat”: a quality or product that would be hard for competitors to replicate, such as a unique recipe, technology, or brand value. When it comes to Champagne, the name is protected by law. Champagne may only be called Champagne when it is bottled within 100 miles of the Champagne region in France, giving these producers a unique edge.
Here, supply and demand dynamics come into play. Demand has risen as the rich (and middle classes in wealthy countries) have become richer and spend more on luxury products, such as Champagne, but supply is fixed by French law. That suggests prices will have to rise to offset higher demand and limited supply.
Why Laurent-Perrier looks a good buy
Back to Laurent-Perrier: the business is smaller than it was. It’s a top-ten producer today, having lost market share as the industry has diversified and newer producers have entered the market. Today, Laurent-Perrier makes up 3.6% of the global Champagne market, but its average selling price is higher than that of its peers.
And it’s not the only public pure-play Champagne company. Lanson and Vranken Pommery also trade on the Paris Stock Exchange. Both are still majority-owned by their founding families at 87% and 71%, respectively. Laurent-Perrier has a higher gross margin than both, just under 60%, compared with a respective 45% and 26%, although these margins fluctuate as all producers buy in a percentage of their grapes every year.
The margin depends on the price paid for grapes on the open market. Laurent grows 10% of its own grapes and buys in the rest, a figure below the industry average of 20%, suggesting it is more exposed to price spikes. But the higher profit margin provides more of a cushion against changes in the market price.
Despite its attractive fundamentals – earnings have tripled since 2013 – the stock looks cheap today. It is trading on a forward price/earnings (p/e) multiple of 12.4 and a price-to-book (p/b) ratio of 1.3. This suggests the market is ascribing almost no value to the Laurent-Perrier brand.
The book value is mostly cash and inventories, grapes and vintage Champagne, as well as land – all tangible assets. After subtracting the value of these assets, the market is valuing the brand at less than €100m, cheap for a business turning over €300m a year. For the right price, the founding family could be convinced to sell, and €100m isn’t much for a larger player such as Diageo or LVMH.
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