Luxottica

Luxottica, the world’s largest eyewear company, and Essilor, the world’s largest manufacturer of lenses, have agreed a 46 billion Euro merger. The core products from the two companies are naturally complementary – namely eyeglass frames and lenses.

Luxottica, based in Italy, designs, manufactures, distributes and retails its eyewear brands. Its own brands include Ray-Ban, Oakley, Vogue Eyewear, Persol, etc. It also makes sunglasses and prescription frames for designer brands, such as Prada, Giorgio Armani, Miu Miu, Chanel, Burberry, Ralph Lauren, Michael Kors, Bulgari, etc.

Essilor, based in France, designs, manufactures and markets a range of lenses to improve and protect eyesight. It also develops and markets equipment for prescription laboratories, and instruments and services for eye care professionals.

First encounter in 2014-2015

I first came across Luxottica in 2014-2015. Given its market leadership, stable growth and earnings, decent ROE, it certainly warranted further study.

Luxottica - Financials 10Y - 2017-01-18.PNG

Luxottica - Profitability 10Y - 2017-01-18.PNG

Source: Morningstar.com

However, some good companies come with a high price tag. It was priced at around 35-40x P/E. I wasn’t willing to pay that kind of price, so I had to skip it. Luckily I did, as the share price was trending down since mid 2015.

luxottica-valuation-10y-2017-01-18

Source: Morningstar.com

Luxottica - Share Price - 2010-2016.PNG

From the peak in 2015 to the bottom of 2016, it’s more than 30% fall. Even after the announcement of the merger and its following ~9% rise, current price is still lower than the level at the start of 2016. This is the case of a great company that is priced too bullish by the market, resulting in below average return since 2014.

You can watch a short and interesting video about Luxottica on youtube here (by Adam ruins Everything).

Alcon

This Luxottica deal reminded me of Alcon, a medical company specializing in eye care products. I used its product, Tears Naturale eye drops a lot in the past.

Alcon - Tears Naturale II.PNG

I discovered this Company during GFC 2008-2009, but I didn’t buy it as I thought others were cheaper. At that time, Alcon was not priced expensively though.

In 2010, Alcon was fully bought by Novartis, and privatized. Gone was another good company for investors to invest and hold for long time. When the deal was announced, I felt silly for missing out Alcon in 2009. Since then, somehow, the name Alcon sticks in my mind.

I hope it reminds me that good quality companies can’t be bought at discount (except during recession). You must be willing to pay fair value (and sometimes slightly above fair value) for good quality companies in normal time. By buying several good quality companies, you can get positive surprises sometimes. Acquisition by other company is one such surprise, giving you additional 20-30% return immediately after the announcement.

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