Adding Some Luxury to Your Portfolio
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.
There is something special about certain luxury brands -- they reflect an image of distinction and exclusivity, commanding a higher price tag that generates elevated profit margins for companies and their investors. A distinctive brand can be a powerful competitive advantage that protects a company's business and its ability to regularly produce and increase earnings.
Discretionary spending can be quite dependent on the economic cycle in the middle term -- consumers usually choose less expensive alternatives when the economic situation looks uncertain. You may need to buy a new shirt, but it shouldn't be so hard to find a lower-priced alternative to Polo Ralph Lauren if you want to save some money and still get a product with decent quality.
But applying a long-term perspective, these companies can be high performers due to their extraordinary growth prospects in emerging markets, where the rise of the middle class provides opportunities for geographic expansion and juicy profit margins. Also, the upper end consumer in the US and Europe can be much more resilient than we might expect considering the economic situation.
Polo Ralph Lauren (NYSE: RL) reported better than expected earnings last week, and the company's management is optimistic about the future on the back of growth prospects in emerging markets. Polo expects an increase of 20% in net sales for 2012, which shows that this business can provide higher than average growth rates despite a challenging economic environment. Shares of Polo don't come cheap at a forward P/E ratio near 21, but their products are no bargain either, and they are growing nicely.
If the economic scenario is not convenient for investing in luxury stocks, you couldn't tell by looking at the latest earnings report from Coach (NYSE: COH). This retailer of high-end handbags, shoes and accessories reported an increase of 18% in earnings per share in comparison to the previous year. Coach is experiencing double-digit growth in comparable store sales in China, a high growth country in which the company's products are receiving a strong acceptance.
Coach is not cheap with a forward P/E ratio of 18.3, but the company has performed extremely well in recent years and there is no reason to believe it can't keep growing strongly in the future. This is a high-quality business with operating margins comfortably above 30%, solid growth prospects and an enviable financial position. A higher valuation for Coach versus other companies in the industry can be clearly justified by the company's fundamentals.
One company that lost some shine recently is Tiffany (NYSE: TIF), which has disappointed investors and lowered earnings guidance in its last quarter. Some economic factors like weakness in the US and Europe are having their toll on the famous jeweler's results, but the company is still doing fine with sales increasing 21% annually in the last quarter.
Maybe this is a good time to consider buying some Tiffany stock at an attractive valuation with a middle or long-term perspective. The stock is trading at a forward P/E of 16.2 times next year's average earnings estimate, which is on the low side of Tiffany's historical valuation. The company still has one of the most distinguished brands in the world and growth opportunities in emerging markets look quite interesting.
As consumers we usually complain about the higher prices we have to pay for certain kinds of products associated with luxury brands, but this pricing power reflects the company's competitive position and brand differentiation. Those factors generate attractive returns on invested capital, which can be a strong ally for long-term investors looking for high-quality stocks.
The following chart compares the returns obtained by these three companies versus those available by investing in S&P Depository Receipts (AMEX: SPY), an ETF that tracks the S&P 500 index. The three companies have outperformed the general markets in the last five years and can keep doing it for the long term if they keep obtaining attractive returns from their high-end brands.
Motley Fool newsletter services recommend Coach. The Motley Fool owns shares of Coach. acardenal 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.
