Investing.com -- RBC Capital Markets has upgraded EssilorLuxottica (EPA:ESLX) to "outperform," citing strong fundamentals and growth opportunities in the ophthalmology sector.
Shares of the eyewear company were up 1.2% at 07:30 ET (12:30 GMT).
The brokerage has also raised its price target for the eyewear and optical giant to €290 from €220 , reflecting confidence in the company’s ability to expand into new markets and leverage acquisitions.
The upgrade is driven by EssilorLuxottica's potential to tap into the ophthalmology market, which RBC values at $36 billion, excluding the pharmaceutical sector.
Analysts see a pathway for the company to enter the contact lens, surgery, and diagnostics subcategories, which together represent a $21 billion market.
RBC estimates that a one-percentage-point market share gain in this sector could generate a $210 million revenue boost for EssilorLuxottica, equivalent to 0.8% of its 2023 revenue.
A key factor in this outlook is the company's recent acquisition of Heidelberg (ETR:HDDG) Engineering, a diagnostics firm specializing in imaging technology.
RBC analysts suggest that this acquisition could be scaled more rapidly by expanding the sales force, internalizing distributor markets, and increasing research and development efforts.
Additionally, Heidelberg's technology could be integrated into EssilorLuxottica's retail network of over 7,000 stores, generating an estimated €100 million in additional revenue and €40 million in EBIT annually.
The analysts also flagged the potential for a strategic acquisition of Bausch & Lomb, a company that media reports have suggested may be up for sale.
RBC notes that EssilorLuxottica is underrepresented in the contact lens segment, with only 7% of its revenue coming from this category compared to the market mix of 15%.
A deal with Bausch & Lomb could provide an "off-the-shelf" solution for expanding into contact lenses and cataract products, leveraging the latter’s existing 9% and 6% market shares in those segments, respectively.
RBC estimates that an acquisition of Bausch & Lomb, valued at about €12 billion with a 20% premium, could be financially manageable for EssilorLuxottica.
The deal would increase the company’s gross debt by €10 billion to €18 billion, pushing leverage to 2.6 times EBITDA, but RBC projects an immediate 3% earnings-per-share accretion in the first year.
If EssilorLuxottica were to divest Bausch & Lomb’s pharmaceutical division, the net transaction cost could be reduced to €9 billion, with a slightly lower EPS accretion of 2%.
Despite its elevated valuation—currently trading at 32 times estimated 2025 earnings—EssilorLuxottica is seen as well-positioned for long-term growth, supported by initiatives such as smart eyewear in partnership with Meta (NASDAQ:META), the Stellest myopia management program, and the Nuance hearing solutions line.
RBC sees these innovations, combined with a broader push into ophthalmology, as key drivers of the company’s future expansion.
The revised price target of €290 reflects higher revenue estimates and an adjustment in the weighted average cost of capital from 8% to 7%.
RBC analysts view the stock's current valuation as justified given its strong growth prospects and market leadership in the optical industry.