My Praise for Luxottica Is Crystal Clear

03/03/2011 2:23 pm EST


Jim Jubak

Founder and Editor,

Not very ambitious, are they?

Luxottica (NYSE: LUX), the biggest maker of eyeglasses in the world (and a member of my Jubak Picks 50 long-term portfolio), announced that it’s looking to increase sales in emerging markets by about 20% in 2011, achieve double-digit growth in its premium and luxury brands (such as Ray-Ban and Oakley), and grow volumes in China and India by 120% over the next three years.

Did I leave out plans to open 40 Sunglass Hut stores in India, 15 in Brazil, and 50 in China? (The company also acquired 70 stores in Mexico at the end of 2010.)

Oh, and by the way: on February 28, the Italian company—which also makes eyeglasses under license for fashion houses such as Prada and Chanel—also reported a 16% increase in sales for the first quarter, a 1.2-percentage-point increase in gross margins, and an increase in net income of 88% from the fourth quarter of 2009.

For the full year, Luxottica reported a 35% increase in net income on a 14% increase in sales. The company announced that it planned to raise its annual dividend payment by 26%, to 44 euro cents a share. At the March 2 closing price, that works out to a yield of 1.9%.

Luxottica is benefiting as well from the economic recovery in the United States. The company forecast 2011 sales growth of 4% to 7% in the US retail segment.

Sales in North America (about 60% of the company’s total sales) of fashion-label licensed eyeglasses, at the wholesale level, to stores such as Target (NYSE: TGT), will grow by 10% to 12% in 2011, the company projects.

But the big driver of sales growth will continue to be the world’s emerging markets, where the company has tripled sales in the past six years. Luxottica forecast that it will finish the year with 500 stores in China.

Luxottica is in the process of turning itself into a low-risk play on growth in the world’s developing economies.

Of course, you get all the usual risk from volatile growth in these economies—and in this fashion business the usual risk of piracy and knock-offs—but you also get solid accounting, a management structure that’s relatively transparent, and a manufacturing and design strategy split between China and Italy.

(Chairman Leonardo Del Vecchio founded the company n 1961 and owns 68% of the company’s shares. CEO Andrea Guerra has held that job since 2004.)

With an earnings growth rate projected at 16%, and a forward price-to-earnings ratio on those projected earnings of 23.5, Luxottica isn’t particularly cheap. But the company’s growth strategy is sustainable in the long run, in my opinion. (Which is, by the way, why the stock is a member of my Jubak Picks 50 long-term portfolio.)

I think $39 is a reasonable one-year target price for the stock. [The stock was trading around $32 midday Thursday—Editor.]

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX ), may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Luxottica as of the end of January. For a full list of the stocks in the fund as of the end of January, see the fund’s portfolio here.

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