Insights

As discussed in our January 2023 letter, herd-like behaviour continues to dominate price action. Investment pricing is experiencing much more pronounced deviations from underlying valuations, both to the upside and downside. In such an environment, we have approached our portfolio actions cautiously, acquiring businesses with favourable long-term expected returns and reducing or exiting those where market participants have become overly exuberant.

Earlier last quarter, we acquired an initiating position in EssilorLuxottica at the Global Moats Fund and the Global Moats Investments. Compared to the high valuations (or low expected underlying return) prevalent across the high-quality space globally, when we acquired our position, EssilorLuxottica was priced for a reasonable long-term expected return.

Essilor was formed in 1972 with the merger of Essel and Silor. Essel started in 1849 as an eye-wear maker’s cooperative and expanded internationally as early as 1868. Silor traces its roots back to the 1930s when George Lissac founded Lissaf Freres. Luxottica was founded by Leonardo Del Vecchio in 1961 and transformed eyeglasses from vision correction to a fashion accessory, starting with its licensing agreement with Armani Group.

EssilorLuxottica is a result of the 2018 merger between Essilor and Luxottica. EssilorLuxottica is the number one manufacturer of corrective lenses with a 42% global market share, while Luxottica is the dominant player in the sunglasses and frames business with a market-leading distribution position. If you wear glasses for vision correction, there’s a high likelihood that the lenses and frames came from EssilorLuxottica. More than two in five lenses and one in four frames are supplied by the company. Additionally, if you buy branded sunglasses, there’s a greater than 50% chance that they are an EssilorLuxottica product, with RayBan being their most well-known brand and Sunglass Hut being their prominent distribution channel.

Source: https://www.uclftr.com/post/are-large-firms-overstating-or-willingly-misinterpreting-their-csr-credentials-essilorluxottica

EssilorLuxottica, in our assessment, is a high-quality business operating in an industry with strong tailwinds. It is a highly innovative business accounting for a disproportionately large portion of the industry’s R&D spend. Its R&D spend is three times the size of the rest of the industry combined. With over 11,000 patents primarily focused on chemical layers and designs, the company continually introduces nearly 3500 eye-wear models annually, keeping its offerings fresh and captivating for consumers. Not surprisingly, about 40% of its revenues are accounted for by products launched over the past four years.

The company has a highly entrepreneurial culture with broad ownership of the company’s shares by employees (employees own about 4.2% of the company, with nearly 40% of employees owning shares).

EssilorLuxottica is poised to capitalize on the strong tailwinds propelling the vision care industry. With rising global demand due to an aging population and evolving lifestyles, the need for vision care is anticipated to surge. Myopia alone is projected to affect half of the world’s population by 2050, while the number of individuals experiencing presbyopia is also expected to rise significantly. Moreover, the company is well-positioned to tap into the growth potential presented by emerging markets, where increasing disposable incomes correlate positively with higher eye care spending.

Source: Company’s CMD Presentation, September 2019

In conclusion, EssilorLuxottica is a high-quality business with a dominant market position, continued commitment to innovation, and a growth tailwind that should feed its growth over the next several decades. While we have acquired an initiating position, we will be glad if the stock price fell as it will allow us to build a full position.