Observing The Sector By Three Different Dimensions

Published Date: 02 Nov 2017

INTRODUCTION

In this final work the main purpose is to study if the luxury industry has been affected by the actual financial crisis.

We decide to articulate this final work observing the sector by three different dimensions: the Ipo market, the trend of the already listed firms, and the trend of a special subsector (the fine watches).

In the first part, after an introduction to the actual financial crisis, we focus on the luxury sector, seen as a mirage in the actual recession, watching at the moment in which firms comes to the market for the first time, and what does it mean "go listed" for this sector in such a turmoil. We construct the price weighted and market cap weighted stock indices taking as sample firms of the core sector which go public during the last years. Comparing these two indices with benchmarks describing the trend of the already listed firms of the sectors, we find that "new luxury" stocks perform better than the last ones, even if their Ipos face the financial market during the actual crisis.

Instead the second part consider the sector behind other two ones during the last 12 years, to prove if its securities are really counter cyclical, using as tools for comparison the multiples (stock price/value driver). We prove the accuracy of some multiples in the estimation of the stock prices, and after that we use these ratios to compare the luxury sector with the countercyclical staple food and with the cyclical automotive industry; finally we state that the luxury is correlated with the staple food sector, therefore is countercyclical.

Lastly, the third part studies the trend of the luxury timepieces during the crisis. In particular we choose this subsector as it has been the most profitable in the luxury. Comparing the market cap weighted index, created putting in the sample the most relevant listed firms of the sector, with benchmarks that are the best known market cap stock index of each country corresponding to the provenience of the firms of our fine watches index, we see that it performs enormously. Therefore we confirm the definition of luxury timepieces as safe haven. To implement the last statement we take the example of an investment fund using as alternative asset class the luxury watches.

LITERARY REVIEW

As we have said in the introduction, we have developed this final work in three different parts. In a few words, we study the trend of the luxury industry during the crisis starting from its role in the Ipo market, then we enlarge the analysis to the past twelve years to detect the counter cyclical features of the industry, and finally we restrict our studying on the luxury watches.

Even if strictly linked, the three parts of the final works are like three different facets of the same topic; therefore we develop the literary review on the theme in three different steps.

First of all, among the literature of the past, we can find a paper of Jean-Noel Kapferer & Olivier Tabatoni of 29 June 2010 having the following title: "is the luxury industry really a financer’s dream? ". This paper analyze the luxury sector, to state why it captures the attention of investment bankers, medias and many middle-class investors, in other words to see if it is really profitable. The most important finding of the work is that final year results are not so excellent for some luxury firms, and that this exaggerated attention devoted to the sector from the financial world comes from the presence of a "dream factor". The dream factor can be explained by the fact that many investors are impressed by the exceptional outcomes of the best luxury companies, therefore they start to think that also the other firms in the sector can perform successfully; in other terms their dream factor is the same of a typical casino gambler.

Starting from this paper, published the year after the 2009, when all the consequences of the start of the crisis came to the surface, we want to prove that the luxury industry does not have such pitfalls (the dream factor), and that investors can really trust in. In other words we want to prove that investing in luxury stocks is not gambling, but it is the certainty of future profits.

We implement the idea to study the trend of the luxury sector during the actual crisis from the article "Piazza Affari crede nel lusso" written by Franceschi A. and Vegezzi G. the 15 June 2012 in the italian financial newspaper "Il Sole 24 ore". In particular the article says that there is a countertrend of the luxury stocks, comparing them to the complicated situation of the Italian financial market. Hence we develop the idea to study the profitability of the industry, during these years of crisis, starting from the delicate first time in which companies face the financial market: the Initial Public offering. To have a more general overview of the topic we have decided to analyze the luxury ipo market on a world basis.

Continuing on the Ipo dimension, we have discover some indices, made by Bloomberg, measuring the entire Ipo market per country and per continent: they are called Bipo and Wipo. Choosing indices per continent, we have measured the contribution of the luxury ipos to the entire Ipo market per each continent.

Secondly, from the speech of Raffaele Jerusalmi in the article of "il sole 24 Ore" that we have mentioned above, we have focused our attention on the "countertrend" word. In particular, by a simple point of view of political economy, under the definition of "countercyclical sector", before the actual crisis, not all the academic books were including the luxury industry. After the start of the crisis the countercyclical nature of the sector has been even more debated; in the matter of this question, we have found a presentation of Deutsche Bank of the 22 April 2010: "Settore Luxury Goods IR & Recessione economica: come cambia il quadro di riferimento metodologico, valutativo e di mercato", where is studied the reaction of the luxury industry to the actual crisis. In this presentation is stated that also this sector has been affected by a de-rating during these years of turmoil; they observe the Beta of the sector, then they compare its trend with the world Gdp and with indicators of wealth in the financial market. From their analysis they find that the luxury has a cyclical nature, in other terms that it replicates the market.

Therefore, as we want to show that the sector is quite profitable also during such a difficult period, we search a way to prove that the luxury industry is counter-cyclical. In fact the second part of our work is focused on the study of this specific nature, and is developed comparing the multiples of the luxury industry with the ones of a strongly counter cyclical sector( the Staple Food) and, to improve the proof, of a heavily cyclical industry (the Automotive).

As regards the last part of the work, we have developed the idea to study the profitability of the luxury studying the fine watches from the report "E’ l’ora di investire" of Pietro Ripa, working in Monte dei Paschi di Siena in the Strategic Planning Area, Research & Investor Relations. To prove and to deepen the results of the report, we create a luxury watches price weighted index and a market cap one; in particular our indices include also a Chinese firm in their calculations, as many empirical researches show that, thanks to the Asia economic boom, China is one of the main leader in the luxury watches sector. Going through the definition of fine watches as safe havens given by the report, we have found a practical demonstration of this statement in the Precious Time, which is the first open-ended watches fund in the world.

FIRST PART: LUXURY IPO AND STOCK INDICES

Crisis, the etymology of this word comes from the greek KRINEIN, which means "to separate, to judge"; going through centuries this word has obtained not only a bad meaning, but also a positive one as during a so called "recession" people are concerned to evaluate entire systems, way of life and so on. In particular during the last century the world had been affected by "financial" crisis, which caused an increase in hunger and poverty in many countries, and a subsequent decade to recover.

The ongoing financial crisis had been imparted on the economy worldwide, in our country as in the entire Europe, coming from the United States, it has started affecting also Asia and Oceania during the last two years.  The Global Financial Crisis had been started during the summer 2007, followed by the collapse of many financial institutions, first and foremost Lehman Brothers which declares its bankruptcy  in 2008 seen by the entire market as a strong signal, as if to indicate  the clouds were going to gather all over the financial world.

When discussing the 2008’s financial crisis, it blames to the so-called "housing bubble".

Mortgage lenders wanted to sell off their diseased assets to securitizers, diseased because of the mortgage lenders’ poor effort to assess borrowers’ capacity to repay their loans. Hence these mortgages had been packaged and sold throughout the world in a way well masterminded. The housing bubble had been boosted through the securitization process whereas the mortgage lenders were entering the phase of distress caused by the fall of their borrowers’ home prices.

Ever since there were years of hell, years in which most of the financial foundations became questionable: the efficiency of the Black-Scholes trading formula, the adequacy of the solvency thresholds for credit banking system.

Also financial regulations became questionable, especially because of the performing mortgages coming from the "parallel banking system", i.e. the shadow banking system.

Moreover there was an incorrect pricing of risk, due to a lack of transparency as regards banks’ risk exposure, which has caused a leverage effect on their Roe.

This caused the demand for more prudential supervision of the financial markets giving rise to start the work for a new regulation: first of all Basel 3.

"In this distressed scenario a mirage seems to come from the luxury industry" as Raffaele Jerusalmi, CEO at Borsa Italiana [1] , affirms during the 4th Luxury Summit in June 2012; he also affirms that the European luxury listed companies, especially in the French and the Italian capital market, show high multiples, even higher than the Asian ones. During the early months of 2012, where the most serious results of the crisis could be seen directly in the most important aggregated market index, luxury stocks are in countertrend. A countertrend that we will study starting from the way that companies use to enter the capital market, to become listed: the IPO.

1.1 Luxury IPOs during the financial crisis

The word luxury defines something expensive, difficult to obtain, not accessible to all. Luxury items may be used as signs of well-being, sumptuousness, magnificence, social recognition, something not essential and not necessary. Economically speaking luxury goods are those goods for which demand increases proportionally to income of who want to purchase them. In terms of quality and price they are at one of the highest level in the market.

After the recovery in the demand of luxury goods during the 2010 which have brought it back to the 2007 level, at the end of 2011 the luxury goods global market seems to be on the verge of 240 Bil $. In particular during the biennium 2007-2009 the consumer confidence was at its lowest and there has been a significant slowdown in consumption in mature markets. Already at the dawn of the 2010 it began to glimpse a signal of resumption mainly driven by emerging markets, especially by China. Furthermore forecasts predict a strong growth in the Asia pacific area, a mature markets consolidation and a greater weight of emerging markets, as Brasil.

It can be said that the reason that explains amazing results for luxury stocks, even in bear market periods, is caused by the geographical diversification of their activity.

The luxury industry actors have been characterized by a high growth profile and profitability multiples above the average of other sectors and successful IPOs. From the latter the feature that we are going to analyze in the first part of this work: the luxury industry IPO which have given a positive contribution to the financial market during these years of crisis.

The main purpose of an Initial Public Offering is to raise expansion capital, but in the luxury industry we have to consider also the advertising advantage that a stock market launch may bring to the company. During this last decade is interesting to compare events of private equity with the IPO’s ones that have taken place in the luxury sector. in particular private equity come with the purpose of restructuring companies: the recent case of Permira is relevant; after five years of renovation, the brand Valentino has been sold in July 2012 for 700 Mil of euros to Mayhoola for Investment (a company from Qatar). By the other side, in the IPO market, during the last decades many luxury companies decided to be listed on Stock Exchanges, especially conglomerates as for them is a "must" acquire and reposition brands with their heritage. Examples of Luxury IPO can be found worldwide during the Financial crisis. We can start the analysis from our country.

1.1.1 Luxury Ipo in Italy

Italy is passing through difficult years because of the crisis investing also countries as Greece, Spain and Portugal. Notwithstanding the financial situation of a country, if a company goes well the market rewards it. This can be demonstrated by Ferragamo that was listed on June 2011.

Ferragamo is the symbol of the italian corporate marketplace, a brand strongly anchored to the Ferragamo family for decades offering shoes, accessories, leather goods and clothes. A company with a rich history behind it, with names of international stars who have helped the growth of the reputation of its brand. Ferragamo has been defined as the "dreams' shoemaker". This successful company listing has been the first IPO in "piazza affari" in 2011, a year in which an amazing turnover was developing in newly affluent countries. To understand the purpose of Ferragamo IPO we can observe its financial results in 2010: total revenues from sales was 781,6 Mil of Euros, with a growth rate of approximately 26% compared to 2009, an Ebitda of 113 Mil of euros, 82,7% more than the previous year, and a Total Gross Profit of 492,240 Mil of euros. Starting from a number of shares pre-IPO equal to 168,410,000, Ferragamo has been listed on the Mta segment of Milano stock Exchange with a number of shares offered ( excluding greenshoe) of 38,275,000, so an offered stake of 22,3%. The management of the company, during the book-building, declared an expectation of growth of the net profit equal to 70 Mil of euros in 2011. The IPO has been resulted in Total revenue of 986,375 Mil of euros in the Income statement of December 2011, as if to say a profit margin of 8, 2413 %.

Another example of successful Luxury IPO is a company that has followed Ferragamo one year later: Brunello Cucinelli. This company has a completely different nature, in terms of secret for success, compared to the previous one, as Cucinelli brand's heritage comes from its fabolous material: superior quality cashmere. The company, thanks to the foresight of its founder, has been expanded through 53 countries, maintaining in its country of origin the major stake of its market. With an integrated operational structure, revenues equal to about 243 Mil of euros in 2011 and an Ebitda that has risen from 14,7 in 2009 to 40,2 Mil of euros in 2011 , the umbrian company decide to go listed with an expected increase of Ebitda equal to 170bps on a three-year horizon. The quotation was anticipated to April 2012 where the company closed its first day in upward of 49, 7%, as if to say with a price equal to 11,6 euro.

1.1.2 Luxury Ipo in the rest of Europe

Pandora IPO (the Danish case)

Even if the Northern Europe was not going through the crisis in a distress way as the Continental part, it's important to include in the IPOs‘ sample also Pandora. Pandora jewelry is a Danish company born on the 1982; across years it gained an international fame opening stores across six continents. The ingredient of success of this company lies in the genuine materials used to produce its original jewels. This expanding reputation of Pandora made rise its sales to 590 Mil of $ in 2009 making it ready for a listing. Pandora's IPO has been defined as "the fourth largest IPO in Europe in 2010" by Forbes. The company was listed on the Copenaghen Stock Exchange in September 2010, and it has been not a simple case of quotation as it consists in a big selloff by private owners, in particular by the private equity Axcel and by the family owners. After the IPO high growth and big margins can be observed looking at the historical prices of the company, especially after the first day of quotation when the share closed at a price being 25% bigger than the previous one. It was relevant also the doubling of the turnover of the Copenaghen's bourse caused by Pandora’s IPO.

1.1.3Luxury Ipo in Usa

With the new organization of the NYSE, strictly overlooked by investment banks, the american stock exchange started to have a sort of monopoly over virtual trading services. Although the United States have been defined as the country who originated the financial crisis, the capital market remains active to feed the financial pockets. In particular it can be said that the US equity capital markets, during the last two years, have been characterized mainly by two IPO: Kors and Tumi.

Michael Kors success has been developed during last two decades, gathering the capacity to create masterpieces which are a combination of what is considered classic american style, of luxury and refinement. After the first semester of 2011 Kors’ revenues amounted to 802,9 Mil of euros, almost 58 % more than the previous year. Michael Kors IPO took place in December 2011 on the Nyse offering 54,280 Mil of euros at a price equal to 20 $; after 3 months, in March 2012 also the secondary offering has been completed, selling 25 Mil of shares at 47 $. Thanks to the IPO the company worth 1, 18 Bil of euros, in market terms.

As every luxury companies, Tumi is characterized by excellence in the production of business and travel accessories. As we have seen for the previous IPO, what distinguish Tumi by the other producers is the innovative usage of nylon to make its masterworks. Tumi recorded at the end of 2011 330 Mil of dollars in sales and about 60,3 Mil of dollars as Ebit. These numbers, following by the world reputation of the company operating in almost 70 different countries, led Tumi to go listed.

Starting with an expectation to collect at least 319 Mil of Dollars, Tumi’s share has been placed on 18 April 2012 on the New York Stock Exchange at 18 $ per share and at the end of the second day of exchange the stock’s price increased already of 47%, compared to its IPO price.

1.1.4 Hong Kong Luxury Ipos

Shifting our analysis on the other side of the world, during last years it’s possible to find a high concentration of Luxury IPOs on the Hong Kong Market.

What we have to keep into account is the evolution that the Chinese financial system has crossed over the last 40 years creating an actual financial framework, even if still characterized by the central role of the banking system in capital raising operations and by the presence of the government institutions’ "leading role".

From the 2004, with the growth of investment banking activities in China, it has been the most developed country in the entire Asia, and this trend seems to be maintained nowadays [2] .

During these last years the Hong Kong market has seen the most important global luxury IPOs: one example could be Prada Spa.

Prada, a well-known Italian luxury company born at the beginning of the last century, saw an amazing success due to manufacturing techniques, prestigious materials used for its products, its connection with the "ex"-Italian royal family and its creativity. Into the 31 January 2011 in the Prada’s financial statement we can observe: the net revenues of 2,046,351 Mil which is 31, 09 % more than January 2010, the Profit for the year equal to 253,551 Mil which is 152, 69 % larger than the previous year. The IPO has been done 23 June 2011 and it has been the first Italian and first luxury goods company to float in Hong Kong. To understand why an Italian luxury industry as Prada Spa decided to go public so far from its original country we can find an explanation in the Chinadaily 8 March 2011 article which says: " Prada seize the best opportunities offered by the international capital markets" as the Chief Executive Officer Patrizio Bertelli said in an interview; but certain rumors say that Prada Spa chose Hong Kong because there its shares has been overvalued compared to other financial judgments. In the analysis of the demand from investors we have to consider also tax implications. With an issue price of 5,07 $ (almost 39,60 Hong Kong dollars) per share, Prada obtained $ 2,1 Bill of proceeds in such a volatile market, starting its first days recording moderate gains.

Almost 10 days before Prada IPO, another important company has been quoted on the Hong Kong market: Samsonite. Samsonite is a world 100-year company experienced in the production of travel luggage. Born in 1910 in Colorado as a trunk production, going through last century it has been specialized in the innovation of luggage of many styles: casual, classic and so on. Talking about this public offering is important keep into account the property of the company, and specifically the presence of the private equity CVC capital partners owning a large stake of the company. Samsonite decided to go listed in a moment of the decay and confusion for the market, in June 2011 like Prada Spa. As can be seen in the 2010 company’s financial statement, net revenues from sales are equal to 1,215,307 Bil of $ which is 18% more than the previous year, gross profit 689,679 Mil of $, 33% more than the data recorded in 2009 income statement. Despite these good results the reality had not acknowledged the merits of the company as it "slumped in its trading debut", as said by Mohammed Hadi of Bloomberg in 2011, few days after the listing. Samsonite International SA had been influenced, by the weak investor demand, to reduce the offer price to HK$ 14, 50 raising 1, 25 Bil $, less than planned. What we can consider here is first of all, as many fund managers said, the timing of the quotation, secondary the taxation (an issue that we found also in the prada IPO case) and finally the fact that in such a period of crisis investors tend to be more cautious.

The combination of investors’ expectations and market timing is crucial in an equity capital market as the Hong Kong one: China is still growing and two IPOs as Samsonite and Prada can be considered as two pillars of the HK market, having a key role also in the "standing-up" to the global crisis.

To complete our Hong Kong IPO discussion we can include in the sample also Coach Inc, an American luxury company already listed on NYSE from the 2000, which in December 2011 have been issued Depository Receipts on the Hong Kong market. We can consider this issue as a special kind of IPO in the Hong Kong market as the instruments issued can be defined as a mechanism to buy shares directly from the home state of the company.

Coach inc is a leather goods company born in New York in 1941. Coach products are characterized by a delicate and meticulous manufacture of precious materials, products which across decades have been contributing to the definition of the real American style. During the last years many boutiques of this company opened in Asia, improving revenues so as to net sales on 30 June 2009 (close date of Coach fiscal year) were equal to 3,230,468 Mil of $(1,56% more than the previous year), and a Gross Profit equal to 2,322,610 Mil of $, boosting their desire to go listed also on the Hong Kong market, to improve their presence in China. The listing of Coach Inc took place on 1 December 2011 on the HKSE, and "it had not involved any capital raise by the company", as said by Saks, Zuppone, Pisani and Winegar on December 2011. On the first day the share price closes at 6,35 $, rising up during spring 2012 and coming back to the previous level during summer 2012. Coach inc entrance in the Hong Kong Stock Exchange with the Depository Receipts mechanism can be considered as an event, allowed by Sec permission, representing a new channel between United States and China’s economy: the channel of the luxury stocks.

1.2 Construction and analysis of luxury indices

Having described the most important luxury IPO in the previous section, we can use them to construct a Stock Index in order to observe the trend of the "New Luxury" Industry (where "new" states for the last companies which have been listed during the financial crisis).

Financial theory teaches us that stock Indices are useful to maintain an updated control over the current investments, to check the main parameters that usually characterized a portfolio.

Over years many ways has been invented to construct stock indices: being a methodology mainly used for customized investment portfolio it has been also customized. Nevertheless, there exist two main categories most used in the academic financial world: the price weighted index and the market-capitalization weighted index.

The price weighted index is calculated considering as the weight of each company in the sample its share price. This kind of measure is relevant as giving more importance to the stock price, over the other factors that can characterized a company, a higher price shares company will receive a greater weight compared to the others; so a price-weighted index is more sensible to changes in higher price shares.

The market-capitalization weighted index is usually computed using as weights for each company their market-capitalization. It is also called "value weighted index", and with this calculation it appears to be controlled by few firms. Considering the market capitalization factor, companies having a greater number of shares obtain a higher weighting in the constructed index.

Using as components of our sample the IPOs described in the previous chapter, we can construct stock indices that can help us to describe the trend of the "new luxury industry" coming into the equity capital market recently.

1.2.1The Luxury price-weighted index

Starting from the price-weighted index calculation, we use the following formula to compute such indicator:

where is the share price of the company , is the number of companies that we are considering in the index calculation.

Downloading daily last prices of the luxury companies’ shares from Bloomberg, the index chart come out as following:

In the graph the continuous dark line represents the luxury price-weighted index, and the dashed red line depicts the Standard & Poor’s Global Luxury Index which can be taken as benchmark as it is also a price-weighted index. The S&P Global Luxury index is composed by 80 publicly listed companies of the luxury industry satisfying some investibility requirements.

Comparing our index with the SPGLGUP we can observe that until February 2012, being still composed by few stocks, our index is under the benchmark; this overtaking can be explained by the "survivorship bias" which come out arguing the index by backward induction as it consists in the logical error coming out when we analyze a sample with the "survived" elements. Thereafter it seems that the "new luxury" replicates the "whole luxury", at least until August 2012. From there onwards our index overtakes the benchmark mainly because of the increase in the share price of Samsonite, Cucinelli and Ferragamo in the "new luxury" index.

1.2.2 The luxury market-capitalization weighted index

As regards the market-cap weighted index we have found two interesting ways to calculate it. In the first one is used the following formula:

where is the market-capitalization of the company at time and is the market capitalization of the company of the previous year. [3] 

The second interesting manner to compute the value-weighted index is characterized by a different pondering where is used the Paasche weight: the initial market price multiplied with the current number of shares trading on the market. The specific formula used in this methodology is:

where is the market price of the company’s stock at time , is the number of stocks issued by the company at time and is the market price of the company’s stock at time .

Comparing this index with a world market-cap weighted one it comes out as follows:

The benchmark used here is the "Deutsche Boerse World Luxury Index"; it is an index composed by twenty companies which have the highest level of liquidity in the entire world of the luxury industry. Compared with our value-weighted index DB1LUX it seems to have almost the same trend and it remains under the former one from the last days of 2011 onwards. It is quite important to note that the benchmark DB1LUX is usually computed putting in the sample the best luxury companies in the world; therefore the overperformance of the "new luxury" market cap index means that luxury ipos during the crisis are being even better than the already listed best companies of the sector.

1.3 The contribution of the luxury IPO by continent

There exist many indices in the equity capital market, some of them have been constructed by continent, and in particular there are indices measuring the entire IPO market per each continent. They are called BIPO and WIPO and they are market-capitalization indices updating each year to put in their computation firms listed on that specific year. We can use these indices to observe the contribution of the luxury IPO to the entire IPO market of the specific continent. In particular we can take BeuIPO as the index measuring what is the performance of the IPO market in the Euro area, then we can make a multilinear regression where the "beuIPO" is the dependent variable and the euro area "new luxury industry" IPOs, that we have included in the sample to construct the luxury index, are the explicative variables of the regression. Making this multilinear regression we can measure the contribution that these luxury IPOs have given to the entire euro area IPO market. We will do the same thing for the Chinese area and for the Us area using respectively "BcIPO" and "BIPO" indices.

1.3.1 The empirical methodology

Using a multilinear regression we can study how a character varies depending on average variation of the other characters. The multiple regression is an extension of the simple regression where it is assumed that each value of the dependent variable that we have observed is expressed as a linear function of the corresponding value of the independent variables, with the addition of a residual term indicating the inability of the model to accurately replicate/reproduce the observed reality. For the regression we compute logarithmic returns per each stock time series as this kind of returns are easier to use, compared to linear ones, when we consider different stocks over time.

1.3.2 Multiple linear negressions per continent: the analysis

In a multiple linear regression model we use the extension of the linear regression formula as we have to prove that our variables explain the dependent variable. The formula used in this kind of regression is the following:

Where is the intercept (the value of when the average of the other matrix is equal to zero), ….. are the known values of the independent variables, is the slope of , is the error and is the dependent variable. To compute the regression the Ordinary Least squares assumptions are considered:

as to say that the error are distributed as the normal distribution having expected value of the error equal to zero and a finite variance.

Furthermore, to allow the β estimate to enjoy the property of the correctness we have to assume the hypotheses of exogeneity for the explicative variables.

1.3.2.1 The BeuIPO

Making the first regression for the euro area [4] , we have the following explicative variables: Ferragamo (variable 1), Cucinelli (variable 2) and Pandora (variable 3). Taking data from the last IPO date between those three ones [5] , we have obtained that BeuIPO has a negative intercept. As regards the other coefficients the results indicate that as one of the three variables varies, keeping the other variables constant, the dependent variable varies in the same direction, being the three Beta coefficients positive. Looking at the R2 as the measure of closeness of fit of the regression to the observed data, we can say that the 35,32% of the European market IPO variability can be explained by the trend of Ferragamo, Cucinelli and Pandora stocks. More interesting is the Adjusted R2= 33,74% which measures the closeness of fit keeping into account also the sample size and the number of independent variables. As regards the standard errors, the ones relative to the three explicative variables are close to zero, so it means that the values observed are good estimates of the theoretical ones. Concerning the significance test F, for a significance level of 5%, being the p-value lower than Alfa, we can reject the null Hypothesis, which means that the multiple regression model exists in the reality and is statistically significant; in other terms it means that at least one independent variable explains the European IPO market. To see if the explicative variables are separately significant we have to use the T-test. In this case we reject Ho for a significance level of 5 %only for variable X1 and variable X3, which means that only these two variables has causal effects on the dependent variable. Therefore T test in European analysis rejects the null hypothesis only for two of the explicative variables, which means that if we would not put Cucinelli in the sample the R2 would have been lower. The missing rejection of the null hypotheses is caused by the correlation (almost equal to 0, 36) between two of the three explicative variables put in the European sample: Cucinelli and Ferragamo. When in statistic we find a case like that during a multi linear regression, we can talk about multicollinearity. In particular there is multicollinearity when two (or more columns) of the regressors’ matrix are linearly dependent to each other; this phenomenon can explain why we have a lower statistical significance of the factors and a high level of R^2. Also looking at the Vif (variance inflation factor) values, measuring how much an explicative variable is explained by the other independent ones in a multilinear regression, we can note that Ferragamo and Cucinelli have the highest Vifs. If vif is greater than one it means that there is multicollinearity, even if at a low level. This correlation between Cucinelli and Ferragamo can be caused by the fact that they are both listed at Borsa Italiana, and there have been few Ipos during these years of crisis in Italy.

Excluding Cucinelli or Ferragamo we can compute the same regression:

-without Cucinelli [6] we obtain an R^2 of 35,15%; we reject the null hypotheses in the F test for Ferragamo and Pandora, and we reject also the one of the T test, being the two significance values lower than 5%;

-without Ferragamo we find an R^2 of 22, 14%; also here, as in the previous case, the F test and the T test show that both the two variables affects, also separately, the trend of the Beuipo.

Thanks to the Durbin Watson results we can state that we do not have autocorrelation, as the DW statistic is equal to 2.

1.3.2.2 The BIPO

We make the same regression [7] for the Us area where we have as explicative variables Tumi(variable 1) and Kors(variable 2) IPO. Here the BIPO varies positively if each one of the two variable changes, as Beta is positive for both of them. As regards R^2 the 5, 23% of the Us IPO variablity of the last year can be explained by changes in stock prices of Tumi and Kors. The Adjusted R^2=3, 77%, this percentage states the closeness of fit keeping into account the size of our Us sample and the two independent variables. The explicative variables values are equal to their theoretical values being Standard errors close to zero. Furthermore, in test F, we reject the null hypothesis, so this multiple regression model really exists and is statistically significant, or at least one of the two variables explains the BIPO trend. Continuing with the T test we reject Ho for a significance level of 5% only for Kors.

If we would not include Tumi in the regression, having only Kors as explicative variable we have an R^2=4, 47%; we reject Ho of the F test and also of the T test, so that we can state that Kors alone affects the Us Ipo market, even if only for a low percentage.

Durbin Watson statistic is slightly lower than 2, so it means that here there is positive autocorrelation, even if slightly.

1.3.2.3 The BcIPO

Last of this regression [8] has been made for China IPO market. Here the explicative variables are Prada, Samsonite and Coach Inc, the dependent variable is called BcIPO. BcIPO is positively related only to Coach Inc, instead Prada and Samsonite have negative Beta coefficients. Being the R^2=3, 07% this is the percentage of Chinese IPO market that can be explained by the three IPO included in the sample. Considering also the dimension of our sample and the fact that our independent variable are three the Adjusted R^2 is equal to 1, 78%. As in the previous paragraph we continue our analysis with the standard errors which are low not only for the independent variables but also for the intercept compared to the other two multiple regressions. Moreover in the F test we reject the null hypothesis being the p-value lower than Alfa for a significance level of 5%; going on with the T test we reject Ho only for Coach Inc. Here is not a case of multicollinearity as there is not the evidence of a strong correlation between the three variables, and the Vif are all equal to 1.

Durbin Watson test results give us a value slightly lower than 2 (1, 99), which means that exists a bit of positive autocorrelation.

1.3.3 Results and explanations

Comparing these three analyses made per continent, considering the regression in which we exclude Cucinelli from the explicative variables, we can state that between those three markets Ipo the one more affected by the "new luxury" is the European one. We can justify this result even also observing a portion of the European market: the Italian one. The Italian Ipo market has been affected by times of stagnation also caused by the Eurozone crisis [9] , therefore the higher R^2 can be caused by the fact that luxury Ipo were between other few ones entering the market. Notwithstanding the "poor" European Ipo market, the results of this analysis show that the "new luxury" has a high weight in Europe and, considering their successful performances [10] , that the stocks of this sector are still appreciated by the investors, even in such a turmoil.

SECOND PART: LUXURY: A COUNTERCYCLICAL SECTOR?

During periods of crisis and downturns investors tend to be more risk-averse and seek more defensive stocks. The so-called "diversification strategy" can be driven in two ways: geographically and by industry. Why should we diversify by sector? Because during times of crisis we can distinguish market industries into two different categories: cyclical and countercyclical. The former category is composed by stocks’ prices moving in line with fluctuations of the actual economic cycle (prices rise in boom periods and go down during recessions). The latter are sectors not affected or only partially affected by the actual economic cycle trend.

Therefore during financial crisis it is possible to invest in countercyclical securities to defend themselves against the recession. Counter-cyclical stocks for excellence are: staple food and pharmaceutical ones.

Our purpose, in the second part of this final work, is to state if the luxury industry is really countercyclical compared to the rest of the market, and it can be seen during such a period of crisis in the best way. When we say "compared to the rest of the market" we mean that we can compare the luxury sector with a counter-cyclic and with a cyclic one. In particular we choose the other two industries using the following criteria: we take Staple Food as it is by definition one of the most countercyclical industry in the economy, as also during period of recession people cannot give up on them; then we take Automotive, which has been shown a completely cyclical trend during the crisis as we will see in the next paragraphs.

2.1 Equity valuation using multiples

From an essay of Jing Liu, Doron Nissim and Jacob Thomas, published on the Journal of Accounting Research on March 2002, called "Equity Valuation using multiples", is possible to extrapolate an interesting methodology to analyze the luxury industry and to compare it with the other two industries.

We start from the fact that market prices, if taken alone, cannot be compared between themselves, as such a kind of comparison would be meaningless being firms and sectors quite different from each other (because of different past, strategies, firm structure and so on). Instead, with multiple approach we use market values in a more statistical language. In a few words, taking multiples which came out from the ratio between a stock price and a value driver (for a group of peers per each industry), we can study in which way the multiplication of the value driver (free cash flow, sales and others) by the corresponding multiple can approximate the numerator: the corresponding stock price (or the enterprise value in some multiples).

First step of this empirical analysis will be the usage of ratio representation to assess value drivers. In the second step we will include the average effect of omitted variables allowing for an intercept in the price calculation, in other words stretching the previous presentation. Lastly, in the third step of the analysis we will compare firms’ results, obtained in the previous passages, using them as comparison tools between the selected sectors. The core of the entire analysis will be the examination of the distribution of pricing errors, per each stage, as in such a way we can state if the multiplication really approximates the dependent variable.

Therefore, after the examination of the pricing errors to state the accuracy of the multiples in the approximation of the corresponding market price, we will use some of the "best in the price approximation" ratios to make comparisons between different industries.

2.1.1 Why multiples?

Firms and their competitors often use DCF valuation technique for their projects, because of its accuracy and flexibility in the conducted analysis. Multiple analysis, instead, more than an alternative to the Discounted Cash Flows method, can be defined as an additional assessment which can help to make DCF valuations more detailed. We choose multiples analysis as it consider value as an increasing function of future profits and, at the same time, as a decreasing function of risk. In this way multiple approach conveys effectively comprehensive valuations.

So financial multiples approach is mostly required when there is the need to compare firms or industries. There exist a wide variety of financial ratios that can be used for evaluation purposes, as they come from the combination of the value of the company at the numerator and a so-called "value driver" at the denominator. The choice of the numerator (Market price or Enterprise value) depends by which point of view we start observing the firm; in the same way the denominator is chosen according to what we believe is the main "driver" of a company compared to another one: in other terms the "value driver".

To correctly use the multiples we should satisfy the following requirements: we must compose the right basket of comparable firms and use a logical and consistent calculation.

2.1.2 Which multiples?

In the paper there have been used many value drivers, we choose to use the most important ones across 12 years (from 2000 until 2011): free cash flow, cash flow from operations, sales, ebitda, earnings per share and book value. For sales and ebitda we also consider them in the enterprise value dimension. And finally we calculate also two forecast measures considering three years (2012, 2013 and 2014) which are the Adjusted Earnings per share and the Forecasted Ebitda.

Let us analyze one by one the meaning of the multiples selected.

Price/Fcf: in this multiple we match the market value of a company with its annual free cash flow. The denominator is a narrower measure compare to cash flow, as free cash flow is computed subtracting capital expenditure by cash flow from operations. This ratio states how wasteful or costly (depends by the point of view) is the company in analysis.

Price/ Cfo: this multiple is quite similar to the previous one, with the only difference that at the denominator we consider Cash Flow from Operating activities which are the cash created by the company using its own revenues plus depreciation plus changes in working capital. In other words the denominator states how much cash the company is capable of producing from its working transactions. This ratio indicates how much is appealing, as investment, the company itself.

Price/ Sales: here we have as denominator the "sales" intended as "revenue per share". This multiple is useful especially if we want to compare companies in the same industry, as it changes a lot across different sectors. The price to sales ratio is helpful to study the past, it can be said that this multiple tells the story of a company’s stock.

Price/ Ebitda: in this multiple its denominator excludes interests, taxes, depreciation and amortization. It is useful for shareholders as it states how much they have to spend for a unit of earnings. This ratio is also worthwhile to compare particular activities of firms (or even of conglomerates) having different amount of debt; in other terms it is helpful if you are looking for a reply between companies having different financial leverage.

Price/ earnings: this financial ratio is quite similar to the previous one, with the difference that it specifically indicates which are, in terms of earning, the prospects of growth. To make sense it must be compared with price to earnings ratio of similar companies; if compared with ones from other industries it does not mean anything as different sectors have different earnings growth outlook. Compared with the price to ebitda ratio, price to earnings is more liable to manipulation.

Price/ Book value: the denominator of this multiple is the common equity of the stock which can be derived from the CE in the balance sheet of the company. This multiple indicates what is the amount that shareholders have to pay for the net assets of the company in which they invest. Being the book value a more steady value respect to the company’s market value, it can be considered as an assessment of the liquidation value of the position. The price to book value ratio is considered by shareholders when they need to compare the market value of their investment with a more prudent value, the book value itself.

For the following two multiples we have as numerator the enterprise value which is calculated considering the market cap plus market value of debt, preferred shares, any minority interests of the company, minus cash and cash equivalents. Financial ratios that use enterprise value at the numerator can be considered as an enlargement of valuations using market capitalization at the numerator. These multiples are considered more precise than the corresponded previous ones as they consider also the market value of debt of the firm.

Ev/ Sales: the denominator of this ratio is the annual level of sales. This ratio states what amount should be paid for the "purchase" of the company’s sales. This ratio can mislead as if it is higher than the one of the previous year, it could mean that the level of cash at the numerator is lowering (a bad signal) or that the level of sales is higher than before (a good signal). Therefore when we look at the results we have to analyze the single components of the multiple.

Ev/ Ebitda: in this multiple we have as denominator earnings of the company before the deduction of interest expenses, taxes, depreciation and amortization. This multiple is used to measure the value of the company comparing it with its cash earnings. If someone have to choose between Price over earnings and Ev to ebitda is important to observe that the second one is neutral to the capital structure of the company, so this multiple is quite useful to make a comparison between two companies having different financial leverage. It would be unwise to observe the ev/ebitda for a business having a low profitability margin.

The following two ratios are forward-looking multiples.

Price/ EPS adj: this is a multiple based on the forecasts of the earnings per share. Being a forward-looking multiple, more coherent with valuation’s principles, its earnings are usually normalized so they are a better image of company’s cash flows in a long term view.

Ev/EBITDA forecast: for a forward looking measure like that one, the denominator is selected between ebitda forecasts best representing the long-term company’s outlook. This multiple has a flaw compared to Price over Earnings adjusted as, if we were not in a period of steady progress, the creation of a more consistent analysis will require additional years of estimates.

2.1.3 The choice of the sectors

As we were saying in the introduction of this second part of the final work, we choose to compare the luxury industry with two sectors to see to which one it is more correlated: Staple food and Automotive. To better understand the comparison that we will make between the sectors’ multiples, it can be useful to list some statistics and features for each industry.

Staple food is a sector composed by sellers of food and beverages around the world. By definition Staple is the food that you eat daily, it is a significant part of primary needs of human beings, and mostly they are cheap. In particular, especially in contemporary years of globalization, cultures use to define staples foods that they have stated in their places and that now are in the rest of the world as a symbol of countries they come from.

The Staple sector is unique compared to other ones, as its chain of production, of supply and of demand are characterized by infinite variables. For example if we observe it geographically we note that, depending from the area in which people are, the weather, the kind of field, the overall environment and so on can affect the harvested quantity of staple. Also the lifestyle and the traditional culture of a population can influence the "kind of demand", in other words which kind of staple is more requested.

This industry has been the most profitable in the world market in 2010 as it was maintaining a Compounded annual growth rate of about 4, 5 %, notwithstanding the crisis. After the 2009, year of recession also for this industry, Staple Food start to recover so that it has been forecasted that its total value, for the start of 2016, will be equal to almost 8 Billion of $. Therefore it can be said that, excluding the 2009, the Staple Food faces the crisis in the best way.

As regards the Automotive sector, it includes in its definition above all sellers of motor vehicles. This sector was born in U.S.A in the late 1800, growing fast until the crisis of 1929; during the 80’s the United States has been surpassed by Japan in the production of auto vehicles, maintaining the primacy until 2009 when China reached the first place in the automotive world rankings. The automotive industry during such a recession has seen: the case of forced bankruptcy and subsequent mergers (the example of Chrisler and General Motors), the collapse of its level of sales (especially in the Eurozone so that in November 2012 the European Commission offered its financial support to the sector locally).

We have to consider that this cyclical industry has not only been affected by the 2008 financial crisis, but also by the oil price shock which above all influenced preferences of American costumers who braked their purchases of big vehicles lowering sales levels for the Big Three ( Chrysler, General Motors and Ford).The oil price trend strongly affects the motor vehicles industry as, other than the decreasing of higher oil consumption cars in times of high oil price, also historical deals over this precious and almost rare commodity influence automotive production in many countries, especially in the United States.

Empirical researches show that between 2008 and 2010, in terms of Cagr, the automotive industry in Europe overperformed the Japan, even if the former faced on average only -11%, considering that the total sales of car in the world in terms of unit has been of only 72 Million in 2010.

Considering expectations, notwithstanding the strong recession of the automotive industry in the country, there are positive forecasts for the next years in the US automotive; especially from the 2014 when is expected the start of a new business cycle where better percentages of Cagr will improve rate of returns for the industry in the United States.

Other positive previsions are more oriented towards the Eastern Europe where the automotive sector Cagr has been foreseen to increase of the 8, 5 % between one of the worst year of crisis (2010) and 2018, compared to the 4, 37 % of Cagr for the sector on a worldwide basis; Russia has seen fabulous results during the last 3 years, restarting the growth in the automotive sector already in 2010 with a total car sales of almost 42, 2 Billion of $, 20 % more than the previous year. This fast recover can be justified by the development of car financing, the increasing in demand from owner of old vehicles for new ones and the rise in the production (thanks to the establishment of deals with foreign manufacturers).

Concerning more recent times, specifically the last three months, it seems that a mirage is coming from Japan where, after the recovery from the tsunami, demand increases in the automotive industry; therefore, globally speaking, the continuous decrease in the results of the automotive sector in the Eurozone is offset by better economic conditions in Japan.

2.1.4 Peers in each sample

First of all the word "peer" means something that match, and in some sense is par. In financial valuation this word is mainly used to define "something comparable", "something similar" to what we are analyzing. Specifically here for peers we mean firms which are similar to each other mainly because they operate in the same industry and, consequently they are affected by the same market variables.

Concerning the composition of each industry sample we take ten firms per sector considering a time range of twelve years of historical data starting from 2000 until the end of 2011.

We compose each sample including conglomerates, large cap and small cap companies all over the world, so as to obtain a wider view of each sector. In the sample of the core industry of this final work we include: Coach Inc, Hermes, Lvmh, Richemont, Ralph Lauren, Swatch Group, Tod’s, Tiffany, Ppr Group and Luxottica. As regards the cyclical sector Automotive we mostly consider companies from Us, Japan and Germany as they are the most developed countries in this industry: Nissan Motor, Bmw, Honda Motor, Toyota Motor, Fiat, Peugeot, Ford, Renault, Daimler and Volkswagen. Respecting the counter cyclical Staple food sector we consider in the sample above all the United States companies: Nestlè, General Mills, Danone, Kraft, Mc Cormick & co, Kerry Group, HJ Heinz, Campbell Soup, Dairy Crest Group and Greencore Group.

2.2 The Empirical analyses

Having defined the sample for each sectors, having justified the choice of the valuation using the multiples, and having introduced the hypothesis that stock prices can be predicted using financial ratios, we can explain in details which empirical analysis we are going to use: first of all the mainstream multiple valuation technique and then the multiple valuation allowing for an intercept.

2.2.1The mainstream multiple valuation technique

The traditional multiple valuation is based on the "weak Ordinary Least Squares hypotheses".

In this part of the analysis we have to satisfy the following requirements:

-we assume that in year t the price of the firm i pit (taken by the specific sector sample) is directly proportional to the specific value driver of the firm i at the time t which is xit, so that it follows:

where βit is the multiple on the value driver and εit is the corresponding pricing error. Here each sample we trace, in the three different sectors, will be stated by a realization of pit; in other terms what causes the random behavior of p is ε as it is the random unpredictable error, which is not noticeable.

-to make the analysis more efficient, we divide the equation by the price of the firm i at time t, so as to have:

in such a way the error of assessment is roughly proportional to its price, allowing to produce more accurate appraisals.

-The strongest OLS hypothesis we apply here is that expected value of pricing error must be equal to zero:

By the other side, even if in case of no limitation we would obtain an assessment of βt which give us a lower mean squared pricing error, we have to note that this last requirement, instead, generates higher errors in the corresponded distribution tails, but lower pricing errors for most companies (if contrasted with the unrestricted approach). In other terms what we are doing here, keeping more attention to unbiased pricing errors, is to give a lower weight to pricing errors at the extremities, remaining consistent with econometrics theory where unbiasedness is privileged.

-Going on, applying the expected value to the rearranged last equation, and respecting the previous assumption, which affirms that the average of pricing errors will be equal to zero, we can estimate βt:

- Then we multiply the estimate of βt by the relative company’s value driver to obtain a prediction for the company’s equity value, computing the pricing error as price minus predicted value:

2.2.2 Multiple valuation with an intercept

Going on with the empirical analyses, this second part of the multiple valuation is an extension of the traditional one, leaving the assumption of direct proportionality between the price and the value driver of the same firm i at time t.

In this part of the analyses we have to implement the following passages:

-we compute an intercept αt:

In this part of the analysis we are assuming the existence of an intercept; in other terms we are hypothesizing that there exist some factors [11] , different from the value drivers, which can influence the market price. Therefore in the second stage of this analysis we are improving the precision of the assessment including these omitted factors in the estimation of the market price.

-Then we set again the constrain that the expected value of pricing errors (scaled by price) must be equal to zero; under this last restriction we attempt to estimate αt and βt minimizing the variance of the pricing errors (scaled by price), rearranging the previous formula dividing the equation by price:

The last formula, respecting the constrain of unbiased pricing errors

gives αt and βt as follows:

Last phase of the multiple valuation analysis allowing for an intercept, as in the traditional multiple one, consists in the calculation of the pricing errors as follows:

Observing distributions relatively to each of the three populations we can evaluate the performance given by each multiple, in this part also by the omitted factors represented by αt, in the prediction of the corresponded firm’s stock prices.