EssilorLuxottica: Re-rating story

Our co-head of Italy Research Domenico Ghilotti at EQUITA upgrade EssilorLuxottica to BUY. We think the stock deserves re-rating as a tech & med tech company with opportunities from three drivers (myopia management, Ray-Ban Meta smart glasses and entry in hearing aids with Nuance Audio)

1. We think the company has created the conditions for a structurally higher top-line growth compared to the mid-single digit (around 5%) planned in 2022 for the 2023-2026 period.

2. The group has 3 long-term growth options in different stages of evolution that are not included in the guidance and can contribute to sustain top-line growth over the medium term: roll-out of myopia management solutions and Ray-Ban Meta smartglasses and entry in hearing aids with Nuance Audio (combining in a single product eyewear and solutions for mild-to-moderate hearing losses). We estimate that these

3 drivers can boost top-line CAGR by an additional 150-200bps to 2028, with combined sales well above € 2bn in 5 years. We analyse the 3 projects in more details in the following chapters. 3. 2022 and 2023 delivered a more robust 7% top-line CAGR at constant FX, driven respectively by a rebound of EU/US consumers, product innovation in particular in lenses (myopia management, Varilux XR, Transition Gen X) and GrandVision integration. We think 2024 can continue on the same trajectory as a. US is showing signs of sequential re-acceleration (4Q23 sales up by 5.9% at cFX vs. 3.6% in 9M and the less brilliant part of the business in 2023 –sun retail in NA– is showing stabilization in more international locations), b. innovation is supporting market share gains and positive price/mix; c. EMEA can count on the cross-selling opportunities opened by GV retail chain repositioning.

4. A more prudent message on short term profitability, due to the short-term tradeoff between margin expansion and product innovation, was passed to the market with FY23 results and is not anymore a potential downside risk for the stock price.

5. Valuation (28x-25x-22x Adj PE 2024-25-26) has room for further rerating, being just in line with historical average (1-year forward PE in the 22-32x range) in spite of higher structural growth prospects brought by the 3 strategic initiatives (we have raised 2026 sales by 6%, with top-line CAGR raised to 6.2% from 4.7%) coupled with solid momentum on the core business (we see 2024 continuing at 6/7% cFX top-line trend, with +50bps YoY operating margin expansion).

We have set the new target of € 228PS based on a multiple of 30x Adj PE 2025, discounted to 12M from now, in the upper part of the historical range. A DCF valuation, based on 6.8% WACC and 2.8% perpetual growth, would lead to a similar valuation.

The world’s biggest maker of spectacles wants to be a tech firm (The Economist)

Luxottica is experimenting with smart glasses and built-in hearing aids

https://www.economist.com/business/2024/02/22/the-worlds-biggest-maker-of-spectacles-wants-to-be-a-tech-firm