This story was rerun on 60 Minutes yesterday evening and, though it may be dated, I thought it would be interesting to look into Luxottica (LUX) to see if it may still be a good investment. What I found is this:
From LUX’s low of $36.36 on October 8, 2012, the day following the original airing of the 60 Minutes story, LUX climbed 53.22 percent to reach an all-time high of $55.71 on 5/15/2013. Since then, it pulled back to a closing price of $51.10 on Friday, 6/14/13, representing a decline of 9.02 percent.
Looking at the company’s most recent financial figures, we see a very solid company. On a Y/Y basis, revenue increased 13.89 percent, free cash flow increased 36.49 percent, EPS increased 17.35 percent, and look at EBITDA — a 67.66 percent increase!
On May 20, 2013 LUX made a per share dividend payment of 0.759, bringing the dividend yield to a modest 1.44 percent (i.e. at the closing price of $52.61 per share). The payout ratio is currently hovering at ~34.6 percent, leaving plenty of room for future increases. The company currently pays its dividends annually, usually in May of each year.
Some of the arguments that have been made against LUX are:
- As laser eye surgery and contact lenses become more popular, demand for prescription eyewear could fall.
- Luxury trends can change quickly, and investors should be careful not to mistake fashion trends for long-term competitive advantage.
- As a global marketer, Luxottica has exposure to local economic and political conditions, import restrictions, and currency exchange rate fluctuations. In the U.S., Luxottica is a partner with Sears, which has struggled with the down economy.
- Luxottica is heavily dependent on designer labels to market its eyewear. A loss of contract could negatively affect results.
- Acquisitions will play a part in Luxottica’s growth. But as the company grows, there are fewer targets that can make a meaningful impact on revenue and profits, and it is unlikely that all can be purchased at a price that would be accretive to returns on capital.
Presently, I do not buy into any of them. Personally, I have undergone several eye surgeries and, though my vision was much improved by the surgeries, I still require eyeglasses, especially for reading and/or for short distance viewing. With regard to fashion trends, sure people’s taste change over time, but if the company continues to redesign and innovate (as it has done in the past) it should continue to do well over time.
As the 60 Minutes piece discussed, consumers appear to be very willing to shell-out hundreds of dollars for designer “eyewear,” which is now more or less considered a luxury, “face jewelry” item rather than a functional “medical device” used to correct one’s vision; and LUX currently holds a monopoly over the industry (a truly “wide moat”).
As with any investment, there are risks; and there may come a time when companies, such as online retailer Zenni Optical, may eventually take market share away from LUX, but I do not see that happening any time in the near future. People love to see and feel a new pair of glasses on their faces; so, for the time being at least, LUX is the king of the mountain when it comes to eyewear — and it looks as though it may hold that title for some time to come.
Note: Information for this article was collected from YouTube/60 Minutes, Morningstar.com and the company’s own Web site. Charting data provided courtesy of optionsXpress.com
Disclosure: At the time this article was published, I did not own any shares of LUX, and I had no intentions of purchasing any of the company’s shares at any point in time within the next three trading sessions (i.e. at any time before 6/21/2013)
