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Signet Jewelers Ltd: Fundamental Stock Research Analysis

February 01, 2013 | About:
Before analyzing a company for investment, it’s important to have a perspective on how well the business has performed. Because at the end of the day, if you are an investor, you are buying the business. The FAST Graphs™ presented with this article will focus first on the business behind the stock. The orange line on the graph plots earnings per share since 1999. A quick glance vividly reveals the historical operating record of the company.

Signet Jewelers Ltd. (SIG) is the largest specialty retail jeweler in the U.S. and UK.

This article will reveal the business prospects of Signet Jewelers Ltd. through the lens of FAST Graphs fundamentals analyzer software tool. Therefore, it is offered as the first step before a more comprehensive research effort. Our objective is to provide companies that have excellent historical records and appear reasonably priced based on past, present and future data and expectations.

A quick glance at the graph itself and the orange earnings justified valuation line will tell the readers volumes about how well the company has historically been managed and performed as an operating business. Simply put, the reader should ask whether this example is worthy of a greater investment of their time and effort based on the data as presented and organized. The FAST Graphs’ unique advantage is the graphical articulation of the price value proposition.

Earnings Determine Market Price: The following earnings and price correlated FAST Graphs™ clearly illustrates the importance of earnings. The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.

Earnings & Price Correlated Fundamentals-at-a-Glance

A quick glance at the historical earnings and price correlated FAST Graphs™ on Signet Jewelers Ltd. shows a picture of in-value based upon the historical earnings growth rate of 6.9% and a current P/E of 14.5. Analysts are forecasting the earnings growth to continue at about 11.7%, and when you look at the forecasting graph below, the stock appears undervalued (it’s inside of the value corridor of the five orange lines, based on future growth).

Signet Jewelers Ltd.: Historical Earnings, Price, Dividends and Normal P/E Since 1999



Performance Table Signet Jewelers Ltd.

The associated performance results with the earnings and price correlated graph, validates the principles regarding the two components of total return: capital appreciation and dividend income. Dividends are included in the total return calculation and are assumed paid, but not reinvested.

When presented separately like this, the additional rate of return a dividend paying stock produces for shareholders becomes undeniably evident. In addition to the 13.6% capital appreciation (green circle), long-term shareholders of Signet Jewelers Ltd., assuming an initial investment of $1,000, would have received an additional $899.20 in dividends (blue highlighting) that increased their total return from 13.6% to 14.8% per annum versus 2.7% in the S&P 500.



The following graph plots the historical P/E ratio (the dark blue line) in conjunction with 10-year Treasury note interest. Notice that the current price earnings ratio on this quality company is as high as it has been since 1999.



A further indication of valuation can be seen by examining a company’s current P/S ratio relative to its historical P/S ratio. The current P/S ratio for Signet Jewelers Ltd. is 1.22 which is historically normal.



Looking to the Future

Extensive research has provided a preponderance of conclusive evidence that future long-term returns are a function of two critical determinants:

1. The rate of change (growth rate) of the company’s earnings

2. The price or valuation you pay to buy those earnings

Forecasting future earnings growth, bought at sound valuations, is the key to safe, sound and profitable performance.

The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent commonsense investing decisions.

The consensus of 11 leading analysts reporting to Capital IQ forecast Signet Jewelers Ltd.’s long-term earnings growth at 11.7% (orange circle). Signet Jewelers Ltd. has low long-term debt at 0% of capital (red circle). Signet Jewelers Ltd. is currently trading at a P/E of 14.5, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, based upon forecasted earnings growth of 11.7%, Signet Jewelers Ltd.’s share price would $111.88 at the end of 2018 (brown circle on EYE Chart), which would represent a 13.1% annual rate of total return which includes dividends paid (yellow highlighting).



Earnings Yield Estimates

Discounted Future Cash Flows: All companies derive their value from the future cash flows (earnings) they are capable of generating for their stakeholders over time. Therefore, because Earnings Determine Market Price in the long run, we expect the future earnings of a company to justify the price we pay.

Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low-risk Treasury bonds. Comparing an investment in Signet Jewelers Ltd. to an equal investment in 10-year Treasury bonds illustrates that Signet Jewelers Ltd.’s expected earnings would be 6.2 (purple circle) times that of the 10-year T-bond interest (see EYE chart below). This is the essence of the importance of proper valuation as a critical investing component.



Summary & Conclusions

This report presented essential “fundamentals at a glance” illustrating the past and present valuation based on earnings achievements as reported. Future forecasts for earnings growth are based on the consensus of leading analysts. Although with just a quick glance you can know a lot about the company, it’s imperative that the reader conducts his own due diligence in order to validate whether the consensus estimates seem reasonable or not.

Disclosure: No Positions at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment adviser as to the suitability of such investments for his specific situation. A comprehensive due diligence effort is recommended.

About the author:

FAST Graphs
F.A.S.T. Graphs™ is a powerful research tool providing "essential fundamentals at a glance" on over 17,000 symbols. F.A.S.T. Graphs™ empowers the user to research stocks deeper and faster by allowing them to exploit the undeniable relationship and functional correlation between long-term earnings growth and market price. Warren Buffett, the greatest capital allocator of all time, said; "there are only two things that investor needs to know; how to value a company and how to think about stock prices." With the F.A.S.T. Graphs™ at their disposal, users are able to perform both of these critical tasks... FAST.

F.A.S.T. is an acronym for Fundamentals Analyzer Software Tool that takes all the hours of manual graphing of business fundamentals and reduces it to seconds, giving you critical information in an instant. With one glance you know a lot about the business you are graphing and its past, present and future value. F.A.S.T. Graphs™ should be the first step in every research project. Each graph is worth 1,000 words in describing a company's growth, consistency and valuation.

Visit FAST Graphs's Website


Rating: 5.0/5 (3 votes)

Comments

batbeer2
Batbeer2 premium member - 1 year ago
>> Fundamental Stock Research Analysis

As I see it, Signet is fundamentally in the business of buying and selling gold.

As the price of gold goes up, they earn a lot of money. The gold they sell gets more expensive simply by sitting in the shop waiting for a buyer to come along. You take a look at inventory turnover and you see how they hang on to the inventory long enough to get decent gross margin.

What happens to the profitability of this company if the price of gold heads south?
vgm
Vgm - 1 year ago
I realize the point of this article is to illustrate the analytical methodology, but in practice the time to buy SIG was when the sky was falling in 3 or 4 years ago and deep value investors like FPA were scooping it up. It's up more than 5x since then. I believe they have been unloading of late.
batbeer2
Batbeer2 premium member - 2 months ago

Signet expects to report lower earrings as a result of some margin compression:

2014 Updated Fourth Quarter and Full Year Guidance:

For the fourth quarter, the Company now expects diluted earnings per share in the range of $2.12 to $2.16, based on an estimated 80.3 million weighted average common shares outstanding. The decrease in projected diluted earnings per share is due primarily to projected sales and the impact of lower margins resulting from the factors described above.

Again, I think it's worth considering the possibility that a decline in the price of gold is a headwind for this company.

A company with very valuable inventory (Signet) will find that a lot of their earnings came from the appreciation of the inventory. In recent years, the gold always became worth more in the period between when they acquired the inventory and when they sold the product.

But now that same wind will be blowing in Signet's face. The inventory they hold becomes worth less in the period after they've bought and before they sell.

Anyone know of an (online) gold retailer that operates "Amazon style" or old-school Dell style? By this I mean they they acquire the inventory after they've taken payment from the customer.

 

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