Should We Follow These Jewelers' Insiders?

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

Signet Jewelers (NYSE: SIG) has done pretty well in the stock market since the beginning of 2009.  In February 2009, it was only trading at around $7.13 per share. Afterwards, the share price increased significantly to $61.30 per share as of this writing. To take advantage of the share price increase, two insiders of Signet have cashed out by selling more than $2.2 million worth of stock. Is this move considered a bearish signal?

Business Snapshot

Signet is the largest specialty retailer of jewelry in the US and the UK, with 1,318 operating stores in the US and 535 stores in the UK. The majority of Signet’s revenue came from the US, more than $3 billion, accounting for 80% of the total revenue in fiscal 2012. Kay Jewelers was the biggest revenue contributor, with nearly $1.79 billion, accounting for 48% of Signet’s total revenue. In terms of item sales, the sales of diamonds and diamond jewelry were the biggest in the US, accounting for 73% of the total US revenue. However, the biggest revenue source was watches, which took 31% of the total UK sales. In the last two years, Signet experienced a continuous increase in its same store sales growth; 6.7% in fiscal 2011 and 9% in fiscal 2012.

Positive but Fluctuating Historical Performance

In the last 10 years, Signet has been a consistently positive cash flow generator. The operating cash flow has been fluctuating in the range of $136 million to $515 million since fiscal 2003. Trailing twelve months, the operating cash flow was $312 million and the free cash flow was $186 million. Interestingly, Signet has managed to generate positive profit in nine of out ten years. In 2009, Signet had operating losses of $394 million. The loss was due to a goodwill impairment of $517 million. Over the past 12 months, the net income was $345 million, or $4.09 EPS. The return on invested capital was 15.91%.

In the middle of January, the COO and the CFO of the US division sold 37,482 shares at an average price of $59.84 per share, with a total transaction value of $2.24 million. The company’s insiders also sold out their stock in June and August 2012. Mark Light, the CEO of the US Division, and Robert Anderson, the CEO of the UK Division, cashed out nearly 30,000 shares at an average price of $43.96 - $45.34 per share at that time.

Peers Comparison

At the current price of $61.30 per share, the market capitalization of Signet is $4.96 billion. The market is valuing the company at 15x P/E and 9.45x EV/EBITDA. Compared to its peers, including Zale Corporation (NYSE: ZLC) and Tiffany & Co (NYSE: TIF), Signet has the cheapest valuation. 

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>SIG</strong></p> </td> <td> <p><strong>ZLC</strong></p> </td> <td> <p><strong>TIF</strong></p> </td> </tr> <tr> <td> <p><strong>Operating margin (%)</strong></p> </td> <td> <p>14</p> </td> <td> <p>1</p> </td> <td> <p>18.5</p> </td> </tr> <tr> <td> <p><strong>ROIC (%)</strong></p> </td> <td> <p>15.91</p> </td> <td> <p>-9.16</p> </td> <td> <p>11.46</p> </td> </tr> <tr> <td> <p><strong>D/E</strong></p> </td> <td> <p>0</p> </td> <td> <p>3.4</p> </td> <td> <p>0.3</p> </td> </tr> <tr> <td> <p><strong>EV/EBITDA</strong></p> </td> <td> <p>9.45</p> </td> <td> <p>11.85</p> </td> <td> <p>10.2</p> </td> </tr> <tr> <td> <p><strong><span>Div</span> yield (%)</strong></p> </td> <td> <p>0.8</p> </td> <td> <p>N/A</p> </td> <td> <p>2</p> </td> </tr> </tbody> </table>

Zale seems to be the least preferable company among the three. It had the lowest operating margin of 1%, highest debt to equity ratio of 3.4x, and highest EV multiples of 11.85x. Tiffany is paying the highest dividend yield of 2%, whereas Signet is paying a 0.8% yield and Zale is not paying any dividends. Among the three, Signet had the highest ROIC at more than 15.9%, whereas Tiffany’s return on invested capital was 11.46%, and Zale was generating losses.

Foolish Bottom Line

Signet and Tiffany seem to be the decent jewelry for investors to hold for the long run. However, I don’t feel comfortable enough to initiate a long position in Signet now due to its insiders’ sales and nearly double-digit EV valuation. 

hoangquocanh has no position in any stocks mentioned. The Motley Fool owns shares of Tiffany & Co.. 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