Look Into Luxottica Carefully

Italy-based Luxottica Group (LUX) is the 800-pound gorilla of the eyewear industry. They operate LensCrafters, Pearle Vision, Sunglass Hut and Sears Optical vision centers. They own or license Oakley, Ray-Ban, Chanel, Bulgari, Prada, Coach, Tiffany, Armani and other major brands of eyeglass frames.   Vertical integration and the huge product lines allow the vision centers to sell wholesale products exclusively from the parent company. That business edge may explain why LUX is trading for nearly 26 times their trailing earnings. History, though, shows that LUX hasn't delivered as expected. Zacks sees full-year 2012 EPS of $1.54. That would be up 12.4% from last year but 3 cents below what they earned back in 2007. The shares peaked at $39.40 back then -- a price they are just now approaching again.   LUX View Chart » There have been a number of decent trading opportunities since 2006. All of them came at much lower valuations than today's. Buying LUX at below 21 time trailing EPS has tended to work out well historically. The current price looks too expensive to expect good returns going forward. Twenty-one times the optimistic 2013 estimate of $1.75 would only justify $36.75. Slow growth or an outright recession might make that target unattainable. Morningstar falls on the doubters' side of the ledger with a two star (out of five) rating and a $32 fair value estimate. LUX Ratings View Chart » Luxottica Group is a fine company that would need about a 20% pullback to look as attractive as their designer eyewear. The Trade: Avoid or short LUX until it approaches $31 again.
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