Long-Term Thinking vs. Short-Term Trading
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investors in Fossil (NASDAQ: FOSL) must feel like they have whiplash with the drastic changes in market sentiment towards the company. When the company reports earnings, most investors seem to be trading based on short-term thinking as opposed to long-term investing. I've watched the stock in the past lose half of its value because it missed earnings by just a few cents, and I've watched it rise 20% or more on good earnings results. These moves give savvy investors a chance to dollar cost average into the shares for what should be long-term gains.
The phenomenon with Fossil played out again as the company's current earnings pleased the market, and the stock jumped from the high 60s to over $90 per share. Even with this jump, the shares still appear attractive based on the company's longer-term fundamentals. In the current quarter, net sales increased 14.3% with constant dollar sales up over 18%. This strong showing produced a diluted EPS increase of 15%. The company's most impressive line of business is clearly their watches division. The acquisition of Skagen boosted results internationally. The license to sell the Michael Kors (NYSE: KORS) brand specifically contributed to a jump in jewelry sales in North America.
The watches division saw constant dollar sales up 23.2%, and in Asia the company saw constant dollar sales increase 27.2%. While the company's leather sales increased 8.2% overall, this was based on strength in international markets offset by weakness in North America. The company's international segment saw significant growth throughout the world. European sales were the only slight weak spot. Canadian shipments increased 23.5%, Mexican shipments were up over 65%, and Asia Pacific sales rose 27.2%. Even European sales, which have plagued multiple retailers, increased 7.5% even without the addition of the Skagen brand. The company also saw strong sales in their direct to consumer segment, driven by an 11.2% increase from new stores and a 1.8% comparable sales gain. Based on these results, I would actually make the argument that Fossil represents the best relative value in what I refer to as the accessories industry.
Fossil is calling for full year earnings per share that value the stock at roughly 16 times forward estimates. With analysts calling for 18.5% earnings growth, Fossil looks reasonably priced. Direct competitors include Guess (NYSE: GES), and Ralph Lauren (NYSE: RL). On a relative basis, Fossil offers a better combination of value versus growth than either Guess or Ralph Lauren. Though Guess pays a dividend with a yield of about 3.3%, the company is expected to grow at around 11% versus 18%+ at Fossil. Analysts have also been less than impressed with Guess' earnings by cutting full year 2012 and 2013 estimates over the last 90 days. Though Ralph Lauren might seem like a reasonable alternative to Fossil, the company is a more diversified clothing and accessories company compared to Fossil, which is primarily a watch manufacturer. Whereas styles change and clothing lines can fall out of favor, high-end watches are seemingly timeless. I know that some would suggest buying Michael Kors rather than Fossil based on its faster growth rate, but Fossil seems like a more reasonably priced alternative.
Fossil's licenses the Michael Kors brand, which gives investors growth without the high P/E ratio that Michael Kors sells for. Michael Kors sells for nearly 40 times forward earnings estimates, and though the company is expected to grow earnings at over 30%, this actually argues well for Fossil's future business. With Fossil selling for about 90% of its expected growth rate, and beating earnings estimates on a regular basis, the company represents the best relative value for investors. It takes a strong stomach to hold the stock, as investors constantly switch between worrying about slowing growth, and excitement over positive results. However, Fossil's fundamentals are sound, and investors should ignore short-term trading versus long-term thinking.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Fossil and Guess?. Motley Fool newsletter services recommend Fossil and Guess?. 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.If you have questions about this post or the Fool’s blog network, click here for information.