Is This Jeweler a Diamond Buy?
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Should investors consider Tiffany (NYSE: TIF) as an investment opportunity after its sparkling fourth-quarter earnings results? Or does it seem to be quite overvalued now? Let’s find out.
A Famous Jeweler
Tiffany's fourth-quarter revenue increased 4% to $1.2 billion. Net income rose 1% to $180 million, or $1.40 per share. Since the end of December 2012, Tiffany’s stock price has experienced a significant gain of 22.3%, from $56.40 to more than $69 per share.
Tiffany, founded in 1837, is considered one of the most famous jewelers in the U.S, operating 275 stores in different regions such as Americas, Asia Pacific, Japan, Europe and the U.A.E.
The company’s main product category is jewelry, accounting for around 90% of its total net sales. In the jewelry category, the majority of its revenue, around 60% of the total, came from two product lines: engagement jewelry & wedding bands, and silver & gold jewelry. The two other product lines -- statement, fine & solitaire jewelry and designer jewelry -- collectively accounted for around 30% of the total revenue.
In terms of geographical segments, Tiffany derived most of its revenue, $1.8 billion, or 47.5% of the total 2012 revenue, from the Americas. The second biggest region was Asia-Pacific, generating $810 million, or 21% of its total sales while Japan and Europe contributed around $639 million and $432 million in total 2012 revenue.
Growing performance with consistent cash generation
In the past three years, Tiffany reported strong growth in its comparable-store sales worldwide, at 8% in 2010 and 13% in 2011. However, the comparable store sales growth slowed down in 2012, with only 1% on a constant-exchange rate basis.
Tiffany has experienced decent growth in its top and bottom lines in the past ten years. Revenue increased from $2 billion in 2003 to nearly $4 billion in 2012, while the net income rose from $216 million, or $1.45 EPS, to $416 million, or $3.25 EPS, during the same period.
The dividend has also been on the rise, from $0.18 per share in 2003 to $1.22 per share in 2012. Furthermore, Tiffany has consistently generated positive operating cash flow, fluctuating in the range of $131 million to $681 million during the that 10-year period. In 2011, the operating cash flow was $328.3 million and the operating cash flow stayed at $108.8 million.
Tiffany seems to have a decent balance sheet with a reasonable amount of leverage. As of Jan 2013, Tiffany had $2.61 billion in total stockholders’ equity, $504.8 million in cash and nearly $960 million in both long and short-term debt. In addition, the company recorded more than $361 million in pension benefit obligations.
Cheap or overvalued?
At around $69 per share, Tiffany is worth around $8.7 billion. The market values Tiffany at 11 times EV/EBITDA and 2.3 times sales.
That valuation seems cheap compared to the valuation of Swatch’s (NASDAQOTH: SWGAY.PK) acquisition of Harry Winston’s (NYSE: DDC) luxury jewelry business in the beginning of 2013. The acquisition would give Swatch’s ownership of around 25 jewelry boutiques and 190 points of distributions for its watches. The total acquisition value was around $1 billion, including $750 million in cash and the assumption of $250 million in debt.
Nick Hayek, Swatch’s CEO, commented that the Harry Winston brand could generate more than $1.1 billion in revenue and $265.6 million in profit in the next four to five years. According to Barron’s, the deal valued Harry Winston brand at as much as 23 times EV/EBITDA and 2.4 times sales.
Swatch, at around $28 per share, is worth around $30.5 billion on the market. That's bit more expensive than Tiffany, at 12 times EV/EBITDA.
My Foolish take
With a strong brand footprint, Tiffany could be considered a decent stock for investors to hold in the long run. If Tiffany is a buyout target, I personally think it could fetch as much as 14-15 times EV/EBITDA, a premium of 30% or more to its current stock price.
Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!