North America Gives Essilorluxottica a Boost, Management Bullish On Margins; Shares a Bit Expensive

We expect to increase our fair value estimate for wide-moat Essilorluxottica by a high single digit following better-than-expected profitability delivery in 2021. Management also guided for a stronger profitability lift to 2026, with the operating margin reaching 19%-20% from 16.1% in 2021 (on an adjusted basis, excluding acquisition-related expenses). This compares with the 17% operating margin we forecast for the firm by 2025 and is more ambitious than midterm operating profit growth of 1-1.4 times revenue announced at the capital markets day in 2019. Margin progression would mainly be a result of synergies between Essilor and Luxottica (EUR 300 million-350 million targeted for 2021 have been exceeded, EUR 400 million-600 million should be delivered in the next two years), and synergies with recently acquired Grandvision. Essilor & Luxottica synergies so far have exceeded our expectations (EUR 337 million) and we may revise our synergy assumptions upward from the lower end of guidance (EUR 450 million currently in our models). Expected profit improvements are to come from operating leverage, with the gross margin largely stable and includes reinvestment in the business. Mid-single-digit top-line growth assumptions were maintained. We believe the current share price already incorporates a more ambitious margin progression.