EssilorLuxottica

The stock for the far-sighted

In the past, people often had to hunt and fight. Back then it was clearly an advantage if you could see far into the distance. Today that has completely changed - already in school we stare endlessly into books and workbooks, we constantly use our smartphones or work for hours in front of a computer monitor. No wonder that, statistically speaking, we're becoming more and more nearsighted. To all the parents among you: send your kids outside to play more often - that can make a big difference!

Nearsightedness is clearly a disease of modern times & the number of nearsighted people will continue to rise in the coming years. According to forecasts, half of humanity will already suffer from it by 2050. But no reason to worry, after all there are modern glasses. As an investor, it would make sense to get a piece of the eyewear business, wouldn't it? With the world market leader EssilorLuxottica, that's easy to do.

The history and business model of EssilorLuxottica S.A.

EssilorLuxottica came about through a whole series of mergers. The eyewear giant has its origins in Paris in 1849, when 13 eyeglass workshops joined together to form a workers' cooperative called L’Association Fraternelle des Ouvriers Lunetteries. It was later renamed Société des Lunetteries, or S & L for short, which when spoken sounded like Essel. As early as 1880, Essel ventured onto the international market and opened a branch in London. But it was also able to expand enormously in France itself. Several smaller factories were bought up, which allowed it to enter the business of manufacturing eyeglass frames as well. Research was also done on lenses: in 1959 Bernard Maintenaz, an engineer at Essel, developed Varilux - the first progressive lenses.

In 1919, Georges Lissac opened an optician's shop in the middle of Paris. There he initially focused on retailing lenses and frames before becoming an eyewear manufacturer himself. In 1959 Lissac came up with a groundbreaking invention: the Orma 1000 lens - it was made of a much lighter material. His business also joined a company early on. After several mergers, the Société Industrielle de Lunetterie et d'Optique Rationnelle, or Silor group for short, was founded. In 1972 it finally merged with Essel to create Essilor. Together they became a big player in lens manufacturing.

In 1935, the Italian entrepreneur and designer Leonardo Del Vecchio was born in Milan. He grew up in an orphanage and founded the company Luxottica at the age of just 26. Initially it mainly produced accessories and components for other opticians. But in 1971 the company managed to make a leap: Luxottica made its own eyeglass model, which was exhibited at an optician trade fair in Milano. Because the model was so well received, it has focused on making its own frames ever since. Business went brilliantly and it was gradually able to buy several brands. Luxottica owns in-house brands such as Oakley, Persol and Ray-Ban, but also licensing agreements to produce eyewear with well-known luxury brands such as Armani, Burberry, Chanel, Prada or Versace. In October 2018 the frame expert Luxottica merged with the lens market leader Essilor. The new, seemingly unassailable king of eyewear, EssilorLuxottica, was born. Together they have a global market share of almost one third, and thanks to useful synergies that could grow even further in the future.

What's next for EssilorLuxottica?

Without a doubt, the number of people who need glasses will keep growing. On the one hand because of the nearsightedness mentioned in the introduction, and on the other because of rising life expectancy. More and more people are getting older, and eyesight simply declines with age. That won't change anytime soon either. In addition, EssilorLuxottica is very well positioned to sell vision aids to people in emerging markets. After all, around 4.3 billion people worldwide need glasses, but only 1.8 billion actually have them. So there's still enormous potential here.

To grow even further, the group is currently on a shopping spree again. This time it has set its eyes on GrandVision. Currently under negotiation is the 76.72% stake held by the Dutch HAL Holding. GrandVision is a globally operating optical retail company that runs over 800 Apollo stores in Germany. Furthermore, EssilorLuxottica also wants to push its online business. It's currently also in negotiations here to buy Brille24. Both acquisitions still need approval from the regulators in the respective countries, but I'm assuming the applications will be granted.

If you look at the chart, you notice that the stock has been moving sideways for several years. It seems that shareholders weren't convinced by the merger for a long time. On top of that, the two CEOs had a somewhat bigger disagreement, which fortunately was resolved at the beginning of May 2019. Since then the stock has been rising again, and I think it will continue to do so in the long term.

What about the dividend?

Essilor shareholders have received a dividend since 1989, and since 1994 it has been raised every year. This means EssilorLuxottica joins the Dividend Aristocrats this year. The current dividend yield is only 1.5%, but together with an annual increase of around 9% (average of the last 10 years), it adds up to a nice little sum in the long run. At 48 percent, the payout ratio is also still relatively low - so there's enough money left for investments and acquisitions within the group.

Conclusion:
In my eyes, EssilorLuxottica shines with very promising future prospects. More and more people will need glasses, and together the two large groups can create wonderful synergies. Far-sighted investors should definitely take a closer look at this stock. And not only during a price decline can you calmly add this company to your portfolio.