Luxury, an Investor's Best Friend?

Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

With the Dow Jones Industrial Average fighting back above the 14,000 mark and individual investors piling their money back into the stock market could we be heading back to the business boom days? If we are back to the boom days, or even if we’re heading there, you can expect a lot more money to be spent on the luxury goods of Tiffany & Co (NYSE: TIF), Coach (NYSE: COH) and in the stores of Saks (NYSE: SKS).

A Girl’s Best Friend

In the 1949 Broadway production of Gentlemen Prefer Blondes Carol Channing sang a song titled “Diamonds Are a Girl’s Best Friend.” Marilyn Monroe made the song eternally famous with her own rendition, and now girls everywhere crave the diamond. When it comes to diamonds and a long history of great branding, Tiffany’s is a true winner.

Think about the things that you associate with Tiffany’s for a moment. I know that the Tiffany Blue color that graces their bags popped up in some people’s minds; how about Audrey Hepburn’s Breakfast at Tiffany’s? That long history of branding, and the expert finishing on all of their products, are what allows Tiffany’s to stand out and sell their goods at much higher prices.

All of those expensive diamonds add up for investors who have seen five year EPS growth rates at Tiffany’s of 11.4%, with the three year EPS growth rate at an incredible 21.81%. Those aren’t numbers to cry about, but the pricing metrics might be. The P/E ratio is 19.7, higher than the S&P 500 but lower than the industry average of 26.9. Tiffany’s is also trading at 3.3x tangible book; that’s a pretty hefty markup.

The five year average ROI of 13.2% and the 2% dividend yield at Tiffany’s definitely bring the smile back to my face though. That dividend has a five year growth rate of 19.2%, a figure that would be hard to sustain for any company.

How About Those Purses?

I have never been into a Coach store but I have walked past quite a few, and they always seem to be overflowing with people. Are they spending their money on purses or just browsing? Well, looking at growth numbers, you’d be hard pressed to think they weren’t buying like crazy.

Both revenue growth and EPS growth are in the double digits over the one, three and five year ranges. Sustaining that type of growth over five years is quite a difficult thing to do, especially when you’re selling a luxury product in down-times. The three year revenue growth rate sits at 11.74% while the three year EPS growth is an incredible 18.36%.

The price ratios at Coach are incredibly appealing, especially considering the high growth numbers that they’ve been experiencing. The P/E ratio at Coach is 13.4, right around the S&P 500 P/E. The price to tangible book is a little on the high side at 8.78 but I really don’t think that Coach is going to run into any issues that would cause investors to have to worry about this figure.

Coach has a dividend too! It’s actually quite a nice one at 2.5%! Oh, I should also add that there is no long term debt at the company. That’s right, a LT debt to equity ratio of 0!

A Shopper’s Paradise

Saks Fifth Avenue is the wealthy shopper’s paradise. The store carries designer clothing and accessories for both men and women at their stores across the United States.

Earnings at the department store grew by 56% last year and revenues are growing over the three year time frame too. If we take a look at what the analysts believe is coming over the next two fiscal years we see no growth in this current year but 13% growth in the following year.

Unfortunately for Saks, I don’t think their pricing metrics justify their 13% growth over two years. The P/E at the company is an incredibly high 23.7. Sure, Saks will be around for a long time to come, but do you really want to pay almost 24 times 2012 earnings to own it?

Another thing that I’m not too keen on at Saks is the lack of dividend. Both Tiffany’s and Coach offer pretty nice dividends that would go great in a dividend investor’s portfolio; Saks does not.

Bottom Line

I like both Tiffany’s and Coach at their current levels. Of course, you should monitor the stocks yourself and wait for the perfect buying opportunity. I’d definitely recommend avoiding Saks, unless there is a major pullback in the near future. 

Ash1402 has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus