Stock price: €18.8 ($25.58)
Conclusion: We reiterate that Luxottica (LUX) looks fairly valued. Earnings recovery seems to be priced in. We upgrade our valuation range to €21-€22 per share to account for the positive impact of a higher dollar.
2009 results: sales down 2% to €5bn, down 3.8% like for like. Earnings down 17% to €0.69 per share. Guidance 2010: mid single digit growth in sales, more than proportionate increase in margins.
- Mid single digit growth looks great considering its geographic exposure.
Luxottica remains heavily exposed to mature markets which should continue to expand at a moderate pace. Emerging markets account for only 7% of group sales (15% of the wholesale division), while mature markets account for the bulk of revenues. Nevertheless, Luxottica started the year with improved sales momentum in its US retail business, with Lenscrafter comparable sales up 7% in the first two months. We expect Luxottica’s own brands, Oakley and Ray Ban, to outperform its portfolio of licensed luxury brands which are more cyclical.
- Margins could rebound to 12.2% in 2010 and 13.3% in 2011.
We expect operating margins to benefit from positive leverage. However the improvement should be held back by the negative impact of continuing downtrading in developed markets. In addition, management confirmed that marketing expenses will start to rebound in 2010, while IT expenses attached to SAP extension will impact earnings until 2012.
We expect earnings to increase by almost 18% to €0.81 per share.
Luxottica trades at 23xP/E and 11.5xEV/EBITDA based on our 2010 estimates. Our DCF based valuation points to €23 per share. Luxottica’s premium looks justified by its leadership position in eyewear, its brand portfolio and its vertical integration.