The Ultimate Vertically Integrated Company You've Never Heard Of
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Based in Milan, Luxottica Group (NYSE: LUX) just might be the ultimate vertically integrated company. And chances are that you have never heard of it.
The fact is that whatever your vision, if you've ever purchased a pair of glasses - nonprescription sunglasses included - you have likely given Luxottica some of your hard-earned money.
That's because Luxottica owns icons in eyewear, such as Oakley and Ray-Ban, and manufactures glasses for other brands that it licenses, such as Chanel and Bulgari, all while owning the retailers LensCrafters, Pearle Vision, and Sunglass Hut. Have vision insurance? Check whether your policy is from EyeMed Vision Care, another part of Luxottica, which conveniently promotes LensCrafters and Pearle Vision on its homepage.
Well, what if you don't buy your glasses from boutiques in the mall? The situation doesn't change much. Luxottica runs the optical departments in Target, Sears, and BJ's stores, just to name a few. It's the dominant player everywhere you go in the optical market, giving it significant sway in the fashion world and, above all, pricing power.
Evidently, for those of us who wear glasses, it's not easy to escape Luxottica's reach, even if we patronize its few competitors and actively seek to avoid its products. After an exhaustive search, the only non-Luxottica sunglasses brand I could find was Quiksilver (NYSE: ZQK), a troubled sporting goods brand that focuses mainly on apparel and that is a bit player at best in the eyewear market.
In the brick-and-mortar world, Wal-Mart's and Costco's discount optical departments come to mind as the last (store)fronts of resistance to Luxottica, although they too cannot escape this behemoth altogether. You'll find Ray-Bans at Costco, for example. But at least you'll find frames from rival manufacturers, such as smaller Italian rival Safilo, there too.
Online shopping is the final frontier in eyewear retail, and it has yet to be dominated by a single site. Of course, Luxottica does compete in this arena. It operates LensCrafters.com. The challenge is for it to overcome our deeply ingrained buying habits. People aren't used to measuring themselves for glasses and having nobody to turn to for adjustments post-purchase. These observations may explain why Canada-based e-retailer Coastal Contacts, which does sell glasses, remains small and unprofitable.
Knowing more about Luxottica's far reach, you must be wondering how its stock has performed. Let's take a look.
As Luxottica has grown, it has made its founder, Leonardo Del Vecchio, a billionaire several times over, and it has rewarded its shareholders handsomely. Enough that they could afford to purchase a pair of the company's Made-in-Italy designer glasses. But as we Fools know, past performance doesn't guarantee future results.
The Key Statistics
- Luxottica is priced at 26 times trailing earnings and 21 times forward earnings, multiples that indicate expectations of continued growth.
- It trades at 3.45 times book value, which reflects the premium investors place on companies that have erected high barriers to entry or "moats," as Warren Buffett calls them.
- There's a 1.4% dividend, but it consumes 59% of the company's earnings. Barring double-digit growth, which Luxottica did in fact achieve in the most recent fiscal year, it seems unlikely that this payout will be increased.
The Bottom Line
Luxottica has delivered consistent growth, demonstrating the business savvy of its management team. It has treated its investors very well throughout the 21st Century, and they have fared far better than its competitors. (Indeed, a recent episode of 60 Minutes portrayed Luxottica's business tactics as Machiavellian.)
Nevertheless, Luxottica is a fully valued stock that has great expectations built into its price. I would advise shareholders to divest some of their holdings, while the stock is near its 52-week high. Because markets are irrational and far from efficient in the short term, LUX may have room to run a little further. I just wouldn't start a position in it.
Likewise, due to the company's strong track record, I wouldn't short LUX. (In general, I don't advocate shorting any stock, as the downside can be many times what you invested. There is more than enough money to be made through long positions.) I'm not alone in this viewpoint; less than one percent of Luxottica's float (freely trading shares) is being shorted.
Would I ever consider buying Luxottica stock? I would on major dips, for example, those that may arise in the event of negative short-term surprises or adverse events. But once I put my glasses on, the coast seems clear.
Fool blogger Jonathan Lim has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.