Betting on Luxury
Shinier Than Diamonds
Tiffany & Co (TIF), which is a part of Daniel Loeb's portfolio (Third Point LLC), is a perfect M&A candidate for bigger luxury groups or diversified conglomerates that invest only in great businesses, such as Buffett's Berkshire Hathaway (BRK.A)(BRK.B). I believe Tiffany's second quarter results clearly support the thesis that the company will start growing year-over-year earnings at rates well above 10%. The reason is the upcoming sales shift towards higher-margin geographies such as non-Japan Asia and Europe which are growing same-store sales (the most significant metric in the industry) at year-over-year rates of 13% and 7%, respectively. In addition, a more favorable commodity environment should also help margins going forward.
As a matter of fact, according to Credit Suisse's analysts, in less than five years, Tiffany & Co could boost its margins by as much as 250 basis points up to 21%. With a very low net debt to EBITDA ratio (0.6 times), trading at 24 times earnings and with a market capitalization below $10 billion, I think Tiffany & Co is a wonderful M&A candidate. I would play along Daniel Loeb on this trade.
Still a compelling luxury goods story[/b]
Operationally, [b]Coach (COH), which is owned by Steve Mandel and James Barrow, has been having some trouble. Here are the company's top three ugly facts: (A)The North America business is losing market share, (B) The company is having problems at maintaining its margin profile and (C) Another round of executives has left the company. That said, the company's price is more than reflecting the aforementioned facts and the brand continues to expand rapidly in high-margin emerging markets such as China. As a matter of fact, Coach's business in China continues to grow same-store-sales at double digits while total sales growth remains at 35% year over year. According to Coach's management, “We continue to see ample growth opportunities for the company's China business, and expect long-term revenue from the region approaching $1 billion.”
Even when North American same-store-sales are decreasing at a rate of 1.7% year over year, I consider that the shares already reflect the problems the company is going through. Being down by more than 4% year to date, Coach (which is debt free) trades at just 14 times earnings, well below the sector's average.
As we all know, “Price is what you pay and value is what you get.” I think both Tiffany and Coach are fairly priced and both deserve a bet at the current valuation level. While Tiffany, a New York symbol of good taste, is performing amazingly well, Coach is going through some serious trouble at its North America business. Nevertheless, those troubles are more than reflected into the company's price. Go long.