EssilorLuxottica: Confident In The Long Term (OTCMKTS:ESLOF)

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Consumer spending has been extraordinarily resilient so far despite geopolitical tensions, supply chain constraints and energy price hikes, which have created myths about people’s actual sense of security. However, our internal team believe that a slowdown in consumption is inevitable and we are confident that investors are preparing for downgrades and thus, they will not move estimates until the ongoing macro challenges will improve. In the UK, where headwinds are stronger, we indicate that consumer discretionary spending will drop, on average, by 14% next year. In detail, for higher incomes, the decline should be less marked at -5% while for the lower ones it could reach -24%. These forecasts are even optimistic since they do not take into account a probable further increase in energy prices and interest rates. A sigh of relief could come from new government stimuli and greater use of credit as well as accumulated savings during the COVID-19 health crisis. But we believe that the worst is yet to come.

With this scenario, we are confident that some sectors will hold up. Primarily, it has been a few months that we are overweighting luxury goods companies. These conglomerates benefit from a mix of positive ingredients such as more diversified exposure to global sales, limited downside risks, stronger pricing power and more limited use of leverage. On the other hand, the sporting goods and retail subgroups are more exposed to the current headwinds.

Among our Mare Evidence Lab’s top picks are Kering and EssilorLuxottica (OTCPK:ESLOF, OTCPK:ESLOY).

EssilorLuxottica’s CMD

Before commenting on the just-released Capital Market Update presentation, the company renewed its partnership with Armani Group, four months before the deadline. The first collaboration between the two houses dated back to 1988 and marked the beginning of a revolution. Indeed, glasses were no longer viewed just as a corrective medical device, but as a fashion accessory to express personality and style. Thus, the industry has been completely reshaped by a new product category. The new licensing agreement for the development, production and global distribution of glasses under the Armani brands will last another 15 years. Therefore, the group continues along the path traced by the founder that just a few months ago passed away.

This path was made up of partnerships, acquisitions, development and growth that will also represent the key directions of the Group in the coming years, as promised yesterday to the market by Francesco Milleri, successor chosen by Del Vecchio himself at the helm of EssilorLuxottica. In addition, the CEO’s first message was related to mergers and acquisitions, addressing them as an integral part of the company’s growth strategy over the future.

M&A strategy & integration

M&A strategy & integration

Looking to the slides, the company sees the entire eyewear market as a single structure addressing the needs of the 150 countries which they supply. Despite raw material cost inflation and the ongoing development of the energy crisis, EssilorLuxottica’s solid foundations have allowed the group to confirm the guidance until the 2026 period. At constant exchange rates, top-line sales are estimated at €27-28 billion at the end of the period, with an adjusted EBIT margin of 19%/20%. Moreover, the company is optimistic about the e-commerce future estimating double-digit growth over the period for a total of 10% sales by 2026.

EssilorLuxottica guidance

EssilorLuxottica guidance

Conclusion and Valuation

EssilorLuxottica has a unique position in the eyewear business and with the ongoing investment in its digital transformation will successfully protect its business from external turbulences. We confirm our buy rating for the world leader in the eyewear sector with a price target of €196 per share (this is also supported by an ongoing buyback). In our initiation of coverage, we explained how the company’s stock price decline was not matched by a fall in earnings expectations. Cross-checking consensus estimates, this mismatch persists.

EssilorLuxottica unique footprint

EssilorLuxottica unique footprint

  1. EssilorLuxottica Q2 comment: All Checked, Buy Confirmed
  2. Kering Q2 comment: Strong Q2 – Buy Again

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