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Tiffany - From Buy to Hold

January 15, 2014 | About:
fedezaldua

Fede Zaldua

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Tiffany (TIF), which is held by Joel Greenblatt (Trades, Portfolio), is one of the best positioned luxury goods chains among the U.S. retail space. That said, the stock is now up by 46% year-over-year and currently trades at 12 times 2014 EV/EBITDA and 20.8 times earnings. I think continued solid EPS growth and earnings upside will keep on fueling a positive market momentum for the stock, but I also think the shares' outperformance period could be over. Nevertheless, Tiffany's shares are still a great hold for long-term focused portfolios.

Continued Operational Performance Should Be Expected

With input costs easing (silver and gold prices, for example, have declined nearly 60% and 20% since 2011) and the company being able to lift prices amid better economic conditions, Tiffany's gross margins should improve by at least 0.90% for the 2014 financial year. As a matter of fact, according to Oppenheimer's estimates, metals account for approximately 10% to 30% of total cost of sales at the luxury goods retail chain. On the other hand, the combination of better jobs figures and home price appreciation in the U.S. makes for an improving demand backdrop for the luxury sector in general. Indeed, Tiffany's same store sales (the most important figure for retailers) are growing at a 5% year-over-year pace. More importantly, this growth rate in same store sales should continue at least until the end of 2015.

On Valuation and M&A Probabilities

As mentioned before, Tiffany now trades at 12 times 2014 EV/EBITDA, which looks expensive compared to more diversified luxury goods companies such asLVMH Moet Hennessy Louis Vuitton (LVMUY). The giant French luxury goods conglomerate trades at 9 times 2014 EV/EBITDA and 16.7 times earnings. However, at a time when M&A activity is gaining traction worldwide, a company which is a clear M&A candidate for bigger luxury groups or diversified private equity firms such as Kohlberg Kravis Roberts & Co. LP (KKR), should trade at a premium. After all, Tiffany's total market capitalization of $11.4 billion looks like an affordable figure at a time when interest rates are still close to the zero lower bound.

More Shareholder Returns Should Also Be Expected

On Dec. 22, 2013, Tiffany announced that a Netherlands court ruled in favor of Swatch and ordered that Tiffany pay the Swiss watch maker $449.5 million plus interest and nearly $10 million in arbitration and legal fees to settle the legal dispute between the two companies. With this event already resolved — even when the court ruled against Tiffany — the American jeweler should be able to re-start its stock repurchase program, which was halted during the third quarter of 2012. Above all, when Tiffany is expected to generate a recurring annual free cash flow of at least $300 million during 2014.

Bottom Line

Even when I would not expect any multiple expansion for Tiffany going forward, the company's bottom line growth should lead to continued stock price appreciation. At least in the foreseeable future, the best might be over for Tiffany's shareholders, but the shares are a great hold for long term investors. The company now pays a 1.4% cash dividend yield but, with the Swatch issue already resolved, I would expect the company to boost its cash returns to shareholders in the coming years.


Rating: 2.0/5 (2 votes)

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