GrowthSpotting: The Art of Global Investing
This series cuts through market noise to explore a handful of what we believe are the most relevant and inevitable global trends for investors seeking growth.
These powerful subthemes take a closer look at what we think is a valuable framework for understanding growth drivers worldwide—our “MANTRA” (Mass Affluence, New Technology, Restructuring and Aging).
Today’s post focuses on A Vision for the Future.
Do you find yourself having to hold your newspaper at arm’s length in order to read? If you’re over 40, you probably have presbyopia. Presbyopia is completely natural and affects most of us eventually. The eye lens is a clear structure about the size and shape of an M&M. As we age, the lens becomes less flexible and can’t change shape to focus on close-up images.1 Things get blurry. Eventually your outstretched arm is going to get tired of holding up that newspaper and you’ll have to consider getting some sort of corrective lenses.
Vision correction is a huge and growing market. Twenty percent of the global population wears glasses and it is estimated that while 4.2 billion people in the world need visual correction, only 1.7 billion actually receive it.2 Some of the growth is due to the world’s aging demographics—as of 2010, the median age of Europe’s population was 40.9.3 In the U.S., close to 40% of the population is over age 45.4
Essilor International S.A. is the world leader in the corrective lens market. It has around 36% market share and sells semi-finished lenses directly to retail chains, opticians, etc. It also has a small business manufacturing non-prescription reading glasses and is the leader in North America in this category. Over 70% of the company’s revenues come from the U.S. and Europe. While only 14% comes from developing markets, I see this as a huge opportunity for them.
As people in developed markets age and their vision declines, they seek out products that help maintain their lifestyle. In addition to plain vanilla lenses, consumers in these markets want more innovative products like anti-reflective and anti-fog lenses. In the developing world, demand for corrective lenses is driven not just by need but also by whether or not someone can afford them, so penetration in these markets is helped by the growing middle class and their increased purchasing power.
Innovation is key in this industry and Essilor has the financial wherewithal to invest in research and development. It’s tackling the market from both ends—rolling out products with higher end features, while at the same time creating products with price points low enough for the mass market. This has resulted in close to half of the company’s sales coming from products brought to market in the last three to four years.5 I’m particularly excited about the launch of the Varilux S Series, a new generation of progressive lenses. Essilor estimates that the penetration rate for progressive lenses is low at around 12%. This should increase with the introduction of Varilux as it is meant to not only give the user a larger field of vision but also to reduce some of the blurriness associated with progressive lenses.
In the first half of 2012, the company reported a 25% increase in operating profits, with margins of 17%. Cash flow has increased steadily over the past few years and grew around 25% in the first half of 2012, leaving the company with a healthy balance sheet net debt at 15% to 16% of equity.
The combination of a growing market and innovation should continue to drive market share and, ultimately, healthy growth at Essilor.
1. Mayo Clinic, September 2012.
2. Essilor 2011 Annual Report.
3. Eurostat: Population Structure and Ageing, October 2011.
4. U.S. Census Bureau: Census Briefs 2010.
5. Essilor 2011 Annual Report.
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The mention of specific companies does not constitute a recommendation by any Oppenheimer fund or by OppenheimerFunds, Inc. Certain Oppenheimer funds may hold the securities of those companies mentioned.