Essilor
July 17, 2009
Stock price: €35.8
Conclusion: Premium looks justified but limited upside based on our valuation range: €35-39
H1 sales: Sales up 9.4% reported (€1663m), down 0.7% organic. Management forecasts H1 margin in line with full year 2008, no guidance given for the full year.
The optical industry is not immune to the economic crisis. H1 sales in Europe and in North America declined by 4.4% (4.6% Q2) and 0.9% (+0.1% Q2) respectively. Emerging markets performed well (Asia Pacific and Latin America were up 13.5% and +9.4%) but they represent less than 15% of consolidated sales.
Nevertheless, Essilor benefited from the positive impact of two factors, first acquisitions (+6%), second, currency (+4%).
We expect sales in developed markets to remain depressed in the second half, while currency impact should diminish and acquisition slightly increase. We forecast sales to increase 8% to €3325m and earnings to grow by 5% to €405m (€1.92 eps).
Essilor trades at 18.7x 2009 estimates. We think the premium is justified by a superior earnings visibility. Essilor suffers from subdued demand in core developed markets but can compensate through bolt-on acquisitions. In addition, management is confident to maintain margin despite a slightly dilutive impact expected from acquisitions. However, the stock seems fairly priced, even based on our long term DCF valuation.
