EssilorLuxottica Stock: No More Upside (OTCMKTS:ESLOF)

Last week, EssilorLuxottica Société Anonyme (OTCPK:ESLOF, OTCPK:ESLOY) presented its latest Q1 results. Since we initiated coverage, the company’s total return has reached almost 45% (including the dividend payment). Our buy rating was supported by A Perfect Combination Of Tech, Pharma, And Fashion backed by the New Collaborations agreement.

On 22/02/2022, we updated our readers on EssilorLuxottica’s Short-Term Margin Pressure. This was mainly due to core operating profit pressure resulting from an unfavorable currency evolution. That said, we remain optimistic about the company’s quality and long-term growth prospects. Since then, shares are up by 6.69% (Fig 1).

On 18/04/2024, the company reported an update on Q1 top-line sales. Today, we are back to comment on EssilorLuxottica’s numbers. We also provide insight into the company’s recent Japanese acquisition and our internal research on Nuance Audio.

Q1 Sales Update

Looking back, we anticipated a promising “start in early 2024 with optimistic estimates by the North American and the EMEA regions.” In addition, the company’s 2026 objectives were set for a turnover between €27 and €28 billion, with a core operating margin in the 19/20% range. In our previous guidance, we were already above EssilorLuxottica’s target with 2024 and 2025 top-line sales at €26.7 billion and €28.08 billion, respectively, and a core operating profit of €4.82 billion and €5.32 billion, further demonstrating the company’s strong performance and growth trajectory.

Last week, after the market closed, the company ended Q1 2024 with mid-single-digit sales growth, in line with the long-term outlook. In numbers, EssilorLuxottica’s sales amounted to €6.33 billion, a 3% increase compared to Q1 2023, which was one of the best quarters in the group’s history (thanks to higher selling prices). Looking back, Q1 2022 and Q1 2023 sales were up by 11.5% and 8.6%, respectively. For this reason, the company’s management commented that there will be easier comparatives and pricing in Q2 2024. Cross-checking consensus estimates, Wall Street analysts were aligned with the company’s total sales. Looking at the details, professional solution sales were up by +4.6%, while Consumers were up by +6.3%. In the management’s previous comments, North America was slightly down in our estimates; still, the region was up by +1.7%. This was due to weakness in the sunglasses category; however, the EMEA region was significantly up by +8.5% with remarkable acceleration compared to Q4 results. LATAM region was also up thanks to the Argentina price inflation effect.

Source: EssilorLuxottica Q1 results – Fig 2

Why are we neutral?

In a nutshell, we now see a balance of risk/reward. Indeed, the company confirmed a positive momentum and remained confident in its ability to deliver on the long-term outlook. Therefore, we believe there are no upgrades to Wall Street earnings expectations in the near-term momentum. This is also coupled with emerging market currencies risk that might drive a lower core operating profit in H1 2024.

On a positive note, we include the following:

1. The company decided to reopen the M&A and acquired the Japanese Washin optics chain. This operation has already received a green light from local antitrust and other authorities. Japan is a crucial country for EssilorLuxottica, and in 2018, the company already invested in “made in Japan” production through the acquisition of Fukui Megane. Looking at the latest deal, Washin has around 70 direct stores and is a retail chain on the model of the Italian Salmoiraghi. Washin stores are mainly located in the Kanto region and some of the most important shopping districts, such as Ginza and Shinjuku in Tokyo. The acquisition will allow EssilorLuxottica to understand optical retail dynamics better. There was no disclosure on price, even if we anticipate a turnover of €50 million with a potential investment of €100 million;

2. For the first time, we deep-dived on Nuance Audio. According to the World Health Organization, by 2050, nearly 2.5 billion people will be affected by mild-to-moderate hearing loss. Meanwhile, 700 million people will require hearing rehabilitation. Changing lifestyles and a rising aging population are the structural growth drivers for the hearing-care market. Here at the Lab, we believe Nuance Audio has the following competitive advantages over traditional hearing aids: 1) attractive price, 2) fashionable accessory, and 3) the audio component might be wholly integrated with the glasses. In addition, we should consider EssilorLuxottica’s geographical store footprint. Therefore, optical and hearing stores might have the same potential consumer base. For this reason, we increase our sales estimates of €200m and €300m in 2025 and 2026.

Earnings Changes and Valuation

Q1 2024 results were aligned with our estimates. There are no changes in the 2024 forecast. And the CEO once again confirmed H1 margin pressure due to FX. Considering a favorable price MIX due to smart glass’ higher entry price and higher listed price in the sunglasses segment (Wayfarer retail glass price goes from €155 to €175) and aligned with EssilorLuxottica’s target, we guide a mid-single-digit growth in 2024. New collaborations also support a 6% increase in top-line sales reaching a total turnover of €26.7 billion in 2024. While, our core operating profit reached €4.5 billion with a margin to the 16.9% area.

Having said that, considering our insight on Nuance Audio and the full integration of the Washin optics chain, we increased our 2025 sales from €28.08 billion to €28.33 billion. We might also expect the potential FDA approval for Stellest in H2 2025. Going down to the P&L analysis, our EBITDA margin is set at €8.25 billion and the core operating profit at €5.15 billion (with a margin of 18.15%). Following the Q1 sales, there are no changes on our 2024 EPS set at €7, while our updated 2025 model factors a slightly higher EPS growth rate. Indeed, our 2025 EPS moved from €8.01 to €8.07. Still, applying an unchanged P/E target of 28x with our next twelve-month EPS estimate (€7.25), we arrived at a stock price of €203 per share (compared to a current stock price of €204.8 per share). For this reason, we have now moved our target status to an equal-weight valuation. Looking back, the company average P/E multiple was 27.2x in 2021-2023.

Risks

On the downside risks, EssilorLuxottica’s top-line sales are mainly generated in mature markets. A consumer slowdown and persistent inflation could lead to lower sales. Further downside risks include changes in private healthcare insurance. On EssilorLuxottica’s specific downside, we should mention:

1. Risk of losing key licenses from competitors such as Marcolin;
2. Value disruptive M&A. We have no details on the Washin optics chain entry price;

3. Delay in GrandVision synergies from the integration process;

4. Currency headwinds (especially in Argentina – LATAM area). In detail, the company reported in € terms, while 63.36% of the total company’s sales are generated outside Europe;
5. Execution in the new hearing loss market. We are increasing our 2025-2026 sales expectation by €200 and €300 million on Nuance Audio. There is high competition in the hearing loss market. This division might be unprofitable for EssilorLuxottica for a long time;
6. Pending FDA approval for Stellest.

Conclusion

Following higher estimates thanks to Nuance Audio, here at the Lab, we are above the company’s ambitious target. And we also value EssilorLuxottica with a higher P/E. Therefore, we now see a balance of risk/reward and moved our rating to neutral.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.