ESLOF - EssilorLuxottica: Value And Growth Ahead

2023-11-26 07:45:19 ET

Summary

• Varilux XR series and Stellest's excellent performance will drive EssilorLuxottica earnings.
• The company signed an exclusive agreement with Moncler.
• We believe that EssilorLuxottica has M&A optionality and might take advantage of its pharma innovation trend.
• Higher targets for the following year mean a higher valuation.

The luxury sector's Q3 earnings season is over, and today, we are back to comment on EssilorLuxottica (ESLOF, ESLOY), which Is A Perfect Combination Of Tech, Pharma, And Fashion . Even if luxury valuation relative to the market is now in line with the five-year historical average , driven by The end of the luxury supercycle , no margin upside, and slowing top-line growth, here at the Lab, we believe this is not the case of EssilorLuxottica. We aim to comment on the company's results and update our readers on two of three current upsides.

Q3 results

Starting with the results, EssilorLuxottica delivered a positive set of numbers in 9M, with revenues above €19.1 billion, up 7.2%. Despite that, Q3 sales reached €6.3 billion, with a drop of 1.6% at current exchange rates. At the regional level, the Asia-Pacific was the region with the most significant growth, mainly due to China's reopenings. Solid performance was also reached in EMEA and Latin America. Direct-to-consumer was down by 1.5% in Q3 at current exchange rates, with the region of North America down due to Sunglass Hot weakness. Looking deeper into EssilorLuxottica's analysis, we should report that the growth mainly comes from the vision category (and this provides an implicit supportive downside protection for the company). The prescription segment confirmed its resilience thanks to a solid price mix supported by the successful launch of the Varilux XR series and Stellest's excellent performance.

Source: EssilorLuxottica Q3 press release - Fig 1

Fig 2

Our Ongoing Upside

1. (New Collaboration). We positively report EssilorLuxottica's statement on Swarovski. The company said that the new collaboration is off to a promising start. As part of our follow-up strategy, in early 2023, we published an analysis of EssilorLuxottica's New Collaborations . Two days ago, the company signed an exclusive licensing agreement with Moncler (another company covered by our team). The Italian-French giant will design, produce, and distribute sunglasses and optical frames for Moncler. The contract will start in January 2024 and run until December 2028 with an automatic renewal option for another five years. This contract replaces a previous partnership with the Marcolin Group. The first collection is scheduled for the fall-winter 2024. Moncler and EssilorLuxottica are a perfect combination to further elevate functionality and timeless aesthetics, with a mix of frames to best experience the city as well as the mountains;
2. (M&A Upside). The French private equity fund Pai Partners, which has held 78.4% of Marcolin Group, is evaluating a potential sale. EssilorLuxottica and Marcolin are headquartered in the same eyewear district in Belluno province. Marcolin has a brand portfolio which include Tom Ford, Zegna, Max Mara, Bally, Pucci and Tod's. In 2022, the company reached €550 million in sales with an adjusted EBITDA of 61 million. In H1, revenue and EBITDA growth increased by 8.8% and 26%, respectively. According to rumors , Pai Partners had mandated Goldman Sachs to gauge the market's interest for a total equity value consideration of €1.35 billion. Here at the Lab, we believe that EssilorLuxottica might be the right candidate (thanks to the higher industrial synergies). In addition, EssilorLuxottica has the financial option for a significant acquisition. In our forecasted number, the company has €9.23 billion debt at year-end with an EBITDA projection of €7.47 billion;
3. Q3 sales were healthy and supported our Fiscal Year 2023 estimates and buy rating. The GrandVision retail integration is offering visible growth in the margin, and myopia management (Stellest) has already exceeded its target to sell 1 million pairs by year-end. All these positive factors, coupled with the pharma opportunity in the hearing aid market, thanks to the single product launch starting in North America in H2 2024, will support the company's target, if not exceed, EssilorLuxottica's projected 2026 targets. According to the Capital Market Day estimate, the company forecasts revenue and core operating profit at €27/28 and 19%/20% range.

Conclusion and Valuation

Post Q3 results and following Moncler's new collaboration, our forecasted Fiscal Year 2023 sales reached €25.43 billion, implying a plus 3.2% yearly growth in Q4. In our numbers, we factor in lower FX headwinds (compared to Q3), Varilux XR series ramp-up, and favorable price adjustments (already started in Q3). In our previous publication, we forecasted EssilorLuxottica 2026 top-line sales at €27.5 billion and an EBIT margin of 19.4% ; today, we believe the company already has the potential to surpass these estimates in 2025. Thanks to mid-to-high single-digit revenue growth, we have now updated our sales estimates of €26.7 billion and €28.08 billion in 2024 and 2025 with an EBIT of €4.82 billion and €5.32 billion, respectively. In addition, the company trades at a 24x P/E with a 6.5% discount vs. Med Tech peers and at a 5.5% discount vs. Consumer Goods players. Our 2023 EPS reached €6.75; in 2024, we are at €7.42. In our view, the company's market leadership in a defensive and expanding sector and the option to take advantage of its pharma innovation trend make EssilorLuxottica a solid buy. Valuing the company with a 28.1x P/E, we increased our buy rating target from €196 to €209 per share.

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