Luxottica's Short, Long Term Outlooks Are Very Different

Stock price: €17.8 (US$26.2)
Conclusion: Luxottica (LUX) shares (up 40% YTD) anticipate a strong turnaround in profits next year. We think it might take longer than expected. Valuation stands above our target range of €15-17 per share.

Following two years of declining earnings (-20% in 2008 and -13% projected in 2009), we “only” look for a 10% increase in net profit next year.

• We estimate that around 55% of Luxottica sales are related to the dollar. Based on current spot rates, the dollar should decline by more than 5% next year, which should impact reported growth.
• Emerging market exposure remains limited, representing less then 20% of sales on our estimates.
• Growth in the US should continue to be held back by consumer deleveraging.
• Pricing pressure in discretionary items is not going to stop.
• Cost control has been excellent but how long can Luxottica afford to cut marketing expenses?

Longer term, we remain positive on Luxottica’s business model, its vertical integration from manufacturing to retail, the strength of its brand portfolio and its excellent management. However, we feel that 22x P/E and 12.6x EV/EBITDA based on our F10 estimates, does not leave much upside for the next 12 months.