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A cheap Small Cap value Stock : Movado

January 12, 2010 | About:
Movado Group, Inc. (Movado Group) designs, sources, markets and distributes watches. Its quality watches are sold in almost every price category comprising the watch industry. Its portfolio of brands includes Movado, Ebel, Concord, ESQ, Coach Watches, HUGO BOSS Watches, Juicy Couture Watches and Tommy Hilfiger Watches and Lacoste Watches. The Company also designs, develops and markets Movado-branded jewelry, which it retails in its Movado Boutiques.

Movado which is based out of Paramus, NJ is a small company with a market capitalization of $265 million. Movado stock reached a high of $35 a share in July 2007. The stock reached as low as $4.65 a share in March 2009 before rallying to its current level of $10.78 a share. The stock which was dirt cheap at its low in March 2009, is still undervalued at its current level based on various quantitative and qualitative factors.

The stock which has faced short term difficulties due to the severe recession was pushed down to irrationally low levels. Investors are overreacting due to Movado’s severe earnings decline and its suspension of its dividend for the foreseeable future. The company which has lost money the past several quarters is expected to lose money for the next several quarters. The stock is also undervalued because it is small and not covered by many analysts (as is the case with many small cap stocks)

One of the reasons Movado has a good future is that its balance sheet is as good shape as it has ever been. It is hard to find a company with a balance sheet as strong as Movado’s. The company has more cash and receivables than total debt. Its total assets are almost five times total debt. Furthermore the company has very little long term debt.

PERIOD ENDING 31-Oct-09 31-Jul-09 30-Apr-09 31-Jan-09
Assets
Current Assets
Cash And Cash Equivalents 49,478 47,474 74,568 86,621
Short Term Investments - - - -
Net Receivables 105,469 76,689 66,110 76,710
Inventory 228,766 248,187 241,603 228,884
Other Current Assets 35,711 41,560 55,185 47,863
Total Current Assets 419,424 413,910 437,466 440,078
Long Term Investments - - - -
Property Plant and Equipment 58,142 60,920 62,903 66,749
Goodwill - - - -
Intangible Assets - - - -
Accumulated Amortization - - - -
Other Assets 28,648 24,502 31,357 57,163
Deferred Long Term Asset Charges 10,014 27,020 23,215 -
Total Assets 516,228 526,352 554,941 563,990
Liabilities
Current Liabilities
Accounts Payable 61,617 55,515 65,933 68,910
Short/Current Long Term Debt - - 65,000 65,000
Other Current Liabilities - - - -
Total Current Liabilities 61,617 55,515 130,933 133,910
Long Term Debt 24,910 40,000 - -
Other Liabilities 20,763 20,190 19,975 22,459
Deferred Long Term Liability Charges 6,116 810 6,527 6,856
Minority Interest 1,970 - 1,855 1,805
Negative Goodwill - - - -
Total Liabilities 115,376 116,515 159,290 165,030


Movado based on its latest quarter 10Q, is trading at slightly above its liquidation value:

In Millions:

Cash * 100% 50,000

Receivables * 80% 84,375

Inventory * 65% 148,698

Other current assets * 50% 17,856

PP/E * 25% 14,535

Total 315,461

Minus Total liabilities 115,376

Total assets at

Liquidation value 200,085

Shares outstanding 24.57

Liquidation value

Per share 8.14

Movado closing price (Jan 10) 10.78

% trading above liquidation value 32%

Everyone has a different formula for liquidation value. For inventory I used 65% for its liquidation value. Inventory plays a big role here for Movado because a large percentage of their assets are inventory. I must note that most of their inventory is finished goods, which may have a higher value than raw materials or WIP. Therefore, it is possible a higher value should be assigned for the inventory, but to be conservative I am not using a higher value.

Below is the data from their recent 10-Q.



Inventories consist of the following (in thousands):

October 31,

2009
January 31,

2009
October 31,

2008
Finished goods $ 144,287 $ 146,073 $ 147,424
Component parts 63,104 81,423 79,322
Work-in-process 21,375 1,388 9,988
$ 228,766 $ 228,884 $ 236,734


The company is also cheap on the basis of EPS. I never use TTM EPS, since I believe it I much more accurate to take an average of EPS over the past several years. Diluted EPS over the past three years is 1.69. Based on a current share price of 10.78 Movado is trading at a 6.4 EPS.

Movado is trading at 0.7 P/S, and 13.7 P/CF (3 yr average). The company has P/B of 0.6 (which should not be a surprised since they are trading below liquidation value).

Movado is expected to grow EPS at 12% per annum. I take this number with a grain of salt since forecasts are usually wrong. Even with no growth, the stock is priced cheap.

The company also has some qualitative measure that I will not put a value on but add to the attractiveness of the stock. Although most of the earnings come from the US, a large percentage comes from overseas. in 2009 38% of net sales came from overseas. This gives the company a diversified sales base overseas which is helpful with a weak domestic consumer.

Geographic Segment Data for the Three Months Ended October 31, 2009 and 2008 (in thousands):

Net Sales Operating (Loss) Income (2)
2009 2008 2009 2008
United States $ 79,615 $ 79,021 $ (4,883 ) $ 3,595
International 49,351 56,825 7,822 11,025
Consolidated total $ 128,966 $ 135,846 $ 2,939 $ 14,620


Finally the company makes excellent watches that appeal to a variety of consumers. Its Tommy Hilfiger watches sell for as little as $40 and its Ebel watches sell for as much as $30,000.

The classic Movado watch has great brand recognition. A movado watch can be spotted from far away due to its unique looking design. In addition it makes high quality luxury watches for $1,000 that can compete with Rolexes that are several times the price. While I do not a number on these qualitative aspects it is clear that this is a great company selling far below its intrinsic value.

I am not the only investor who thinks Movado is a great value play. In a 13G released on Jan 07, 2010 Royce Funds run by guru Charles Royce revealed that they hold 10.59% of shares outstanding.

Long Movado

About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

Visit Jacob Wolinsky's Website


Rating: 3.9/5 (21 votes)

Comments

benethridge
Benethridge - 4 years ago
1. They're also losing money, so I don't see how you could call it a value play...though it does look like a pretty good speculative play.

2. No guru is currently buying.

3. No insider is currently buying.

So, if it's such a great buy, why aren't the insiders and gurus buying it?
yswolinsky
Yswolinsky - 4 years ago
A company that is currently losing money can definitely be a value play, on the basis of past earnings or trading at a low book value.

The Royce funds bought 10% of the company last week. If you had waited for them to buy instead of buying in March you missed out on a 145% rally. Sometimes its not always smart to wait for the gurus.
batbeer2
Batbeer2 premium member - 4 years ago
Nice pick; I like it. At first glance:

Book: Inventory is less than one year of sales and in this case I think it may be valued at close to cash. The book value is quite hard; this provides some downside protection.



Earnings: They have been spending record ammounts on capex recently. I will need to look into this to find out what they have been spending it on, but if one normalises capex a different picture emerges. Given that this company has grown over the past decade, normalising capex is not unreasonable.



Management: They have returned ~110m of cash to shareholders in ten years while growing at a fair clip (both revenue and book value). ROE is decent without leverage. This is a rare combination to find. Looks well managed.

I will look into this one some more, I may find something to poke at, but at first glance, great opportunity.

yswolinsky
Yswolinsky - 4 years ago
Thanks. Let us know what you think after you do your own research
extramiler
Extramiler - 4 years ago
You make some good points, but there is a huge math error in the liquidation calculation: 310MM - 115MM = 195MM, not 299MM. That makes liquidation value< $8, not > $12.
yswolinsky
Yswolinsky - 4 years ago
Please check article
batbeer2
Batbeer2 premium member - 4 years ago
Found two things to poke at;

1) This is a bit of a Grinberg family affair. The A shares have control and the rest of us are free to trade the B shares. I would like it more if it were not so.

2) The cash position is less comfortable than meets the eye. They really need 50m-100m of credit on a seasonal basis. They had to refinance their credit facilities in the first half of 2009 and they did.... but it was not pretty. IMHO they need some more credit to "breathe".

I found out why capex is high. It turns out they spent ±30m on SAP. They expect Capex to drop to 10m for 2010. This seems achievable but I estimate maintenance capex to be ± 15m. 10m is not sustainable.

All this does not change my opinion, but I thought I'd share my findings.
superguru
Superguru - 4 years ago
I have not bought a watch for a long time. My cell phone acts as my watch. No one I know buys or gifts watches anymore. Watches appear to be business similar to newspapers in its cycle.
benethridge
Benethridge - 4 years ago
Maybe the gurus and insiders aren't buying watches either :-)
yswolinsky
Yswolinsky - 4 years ago
Movado does not sell $10 watches. Most of its watches are fancy it is more a jewelry item than an item to tell time with
benethridge
Benethridge - 4 years ago
I know, and I do respect your analysis. I think you have that covered pretty well.

I'm just trying to make the point that it's not just about the numbers...and superguru's point (if I understood him correctly) is that their economic moat may have been eroded by cell phones and such. This is similar to buy caveats laid out by such greats as Buffett and Peter Lynch, and this may be a value trap, not a value...i.e. I personally have to see at least some meaningful turnaround on cashflow or earnings before I will call it a "value stock" at all.

In addition to the number analysis, I look for lasting economic moat, morningstar rating, gurus buying or not, insiders buying and several other such "soft" buy signals. Only when all of the stars line up do I buy...ok MOST if the stars if I really need a buy fix.:-)
yswolinsky
Yswolinsky - 4 years ago
Thanks for your comments.

Cell phones have been around for years and Movado's revenues have only increased. During the past 9 years cell phone usage has dramatically increased in the US.

Revenue in millions

2000 2008

295.1 559.6

If you make $5 watches maybe you should fear cell phones, but no one buys a $1000 watch to tell time.


Only small cap gurus can buy a stock this small there is no way Buffett can invest in a company with a market cap this small unless he wants to become the largest shareholder. And Royce did invest and although they are not as famous as buffett they have one heck of a track record.
benethridge
Benethridge - 4 years ago
Buffett is not my only guru, thanks to gurufocus.com

Who's Royce? If he's a guru, why isn't he on gurufocus?
yswolinsky
Yswolinsky - 4 years ago
charles royce is on gurufocus. Go to roycefunds.com to see more about them. Here is the record of their oldest fund

As of Quarter-End 12/31/09

4Q*YTD*1YR3YR
PENNX4.16%36.28%36.28%-2.98%
Russell 20003.87%27.17%27.17%-6.07%
5YR10YR15YR20YR
PENNX3.35%9.73%10.83%10.21%
Russell 20000.51%3.51%7.73%8.34%
25YR30YR35YR
PENNX11.30%12.64%16.79%
Russell 20009.24%10.37%N/A
benethridge
Benethridge - 4 years ago
Ah, I see him now. Chuck Royce, in the "Premium Managers" section.

This is why I didn't see him before: Apparently, we have to manually add these premium managers to our list of gurus, even if we're already premium members. Odd that gurufocus would do it that way. I wonder why.

That being said, now that I see his profile, no one who owns 1500+ stocks is a guru in my book. There's no way he can know that many businesses, that many managers and understand the subtleties behind that many financial statements every year. He'll eventually fall (or rise) to the market average, IMHO.
yswolinsky
Yswolinsky - 4 years ago
He has over 20 mutual funds(not all managed by him) so it is not surprising that he owns a lot of stocks. Peter Lynch owned thousands of stocks and you mentioned him as a guru.

His 35 year track record is pretty good. 35 years is a lot longer than most people have.
benethridge
Benethridge - 4 years ago
Good point, but I only follow Peter Lynch's philosophy from his books. Doesn't mean that I would necessarily buy a stock he bought, especially if he owned thousands. I believe in Buffett's (and a few other's) philosophy of putting all your eggs in one basket (or a few baskets) and then watching the basket(s) very closely. Just feels right to me.

If you think Royce is a true guru, you have some good evidence for that, I will agree. He's just not going to be one of mine.

gurufocus
Gurufocus premium member - 4 years ago


Ah, I see him now. Chuck Royce, in the "Premium Managers" section.

This is why I didn't see him before: Apparently, we have to manually add these premium managers to our list of gurus, even if we're already premium members. Odd that gurufocus would do it that way. I wonder why.



The Premium Managers usually own a lot of stocks. They all have good performances, but not all of them are value oriented. Also they may have high turnovers. That is why we don't show they trades of particular stocks unless you are familiar with them and add them into your Personalized Guru List.
benethridge
Benethridge - 4 years ago
...then they'll never make it to MY personalized list. :-)

Seriously, thanks, gurufocus. That's a pretty good way of handling this at your website, I think.
yswolinsky
Yswolinsky - 4 years ago
I agree that in general it is good to have focused portfolio especially if you do extensive research but there for sure is an argument to be made for diversified portfolio
benethridge
Benethridge - 4 years ago
Agree. For the general public, I think Buffett would agree with you as well.
yishunwu
Yishunwu - 4 years ago


You make some good points, but there is a huge math error in the liquidation calculation: 310MM - 115MM = 195MM, not 299MM. That makes liquidation value< $8, not > $12.

I found the same error as well. But still, I have no clue how the author get the "PP/E and other long term Assets * 25% 9,666". If take all non-current asset. It should be (58.1+28.6+10)*0.25=24.2m
batbeer2
Batbeer2 premium member - 4 years ago
Question for the arithmetic gurus.....

Do the assets provide downside protection or not ?
alanb9
Alanb9 premium member - 4 years ago




If you make $5 watches maybe you should fear cell phones, but no one buys a $1000 watch to tell time. I did. Actually it was $2500. I needed a robust watch which would last though years of abuse and which I could be assured wouldn't stop at an inopportune time. It is always on my wrist, can't fall out of a pocket like a cell phone. A cell phone as currently designed will never be as convenient as a wrist watch.
idang
Idang - 4 years ago


One potential problem:

By my understanding, the 24.5 common shares does not include the Grinberg's A shares. According to the 2009 10-K, there are ~8M of A shares (that's only the shares held by management), which brings the share count up to ~32M. Possibly more if this does not account for all the A-shares.

Any thoughts?

idang
Idang - 4 years ago
Sorry, my numbers were a little off on the last comment: look at the 2009 10-K. The balance sheet clearly shows 6.6M A-shares. Assuming full dilution, any valuation based on the 24.5M shares should be multiplied by 24.5/(6.6+24.5)=0.78, to accomodate the dilution.
kessbroker
Kessbroker - 4 years ago
Benethridge,

Remember, the stocks listed on a 13F filing include ALL of the stocks that a firm owns. For example, XYZ fund might own 25 - 30 stocks, but managers within the XYZ office manages separate accounts, other funds, etc. At other firms, there are different portfolio managers running completely different funds with different objectives. Using your logic, would you say that Ruane, Cunniff, Tweedy Browne, David Dreman, Jean-Marie Eveillard, Marty Whitman, Robert Rodriguez, or any other manager who works for a larger firm is not a guru? That is a bold claim.

GnDsville
batbeer2
Batbeer2 premium member - 4 years ago
Idang..... from the 10q:

The number of shares outstanding of the registrant's common stock and class A common stock as of November 30, 2009 was 17,931,736 and 6,634,319, respectively.

24.5m seems about right; maybe you are overlooking the treasury stock.

yswolinsky
Yswolinsky - 4 years ago
I agree with you more Kess
kessbroker
Kessbroker - 4 years ago
BTW, the bold font was an accident - not shouting...
idang
Idang - 4 years ago
You're right.

Thanks for the correction.

kfh227
Kfh227 premium member - 4 years ago


I have not bought a watch for a long time. My cell phone acts as my watch. No one I know buys or gifts watches anymore. Watches appear to be business similar to newspapers in its cycle.


I never thought about it, but i think you are on to something there. Same thing for maps, GPS is kinda taking over that arena.
DaveinHackensack
DaveinHackensack - 4 years ago
People don't buy fancy watches to tell time. They are status symbols. For women, they are an accessory, like jewelry; for men, they are one of the few socially acceptable accessories that can be used to signal wealth, status, etc.
Dr. Paul Price
Dr. Paul Price premium member - 4 years ago
Whether or not you buy Movado...

It belongs on everybody's "Watch List" .

augustabound
Augustabound - 4 years ago
Ugh, I see another cheesy titled options post coming. ;)
Sivaram
Sivaram - 4 years ago




I have not bought a watch for a long time. My cell phone acts as my watch. No one I know buys or gifts watches anymore. Watches appear to be business similar to newspapers in its cycle.


I never thought about it, but i think you are on to something there. Same thing for maps, GPS is kinda taking over that arena.


Yep... but the thing is to figure out if Movado (or companies like that) can carve out a niche. I looked at the watch industry a few years ago (I was interested in a Japanese company called Citizen and quickly looked at Movado too) so I thought about their industry quite a bit.

Mechanical watches and fashion watches, which is what Movado sells, are more of a fashion accessory than a timepiece. Sure, some people buy them to tell time but most don't. Except for some specific high quality timepieces, if someone wanted to tell time, they wouldn't buy a Movado watch (or any of their licensed watches like Esquire, Lacoaste, Juicy Couture, etc.) These days, you can find time on your computer, mobile phone, bus station terminal, car stereo, and so on. So time isn't really the main thing (except for some high quality stuff--say you were a sailor or something.)

Instead, the core market depends on people buying watches as a fashion accessory. For men, watches are considered to be the top fashion accessory (if not the top, it's very close to it); for women, it's also a fashion accessory although it isn't as important since they have more choices (handbags and the like are more prominent for them.)

So the question is whether anyone will be buying Movado watches as a fashion accessory. The threat from mobile phones (as timepieces) is already well-known and I don't think it matters much (almost anyone under 40 years old already has a mobile phone and it isn't going to impact the watch industry.) In fact, most of these watch companies had an even bigger threat from electronic wristwatches a few decades ago, which tend to be much cheaper and have more features. But they survived that and I suspect they will survive the mobile phones too (at least for a few decades more.)

These watch companies also face threats from cheaper brands (mechanical watches) from China. So far, companies like Movado have done ok but it all comes down to whether the Chinese (and others) can establish their brands.

I feel Movado is also in the vulnerable mid-end market, which is essentially a pure discretionary industry. People are having financial problems so they could face lingering pressures.

As someone who has looked at purchasing a watch (low to mid-end only), I also don't like the fact that many Movado watches are battery-operated. I personally would rather buy a competitor's watch that is mechanical or solar operated; or buy a lower-end watch that is battery-operated but has more features. However, Movado has a stylish design and has licenses to key brands.

Movado probably has a tiny moat (or no moat at all.) As someone above mentioned, it is controlled by insiders through their dual-class shares so you better be confident with management.
yswolinsky
Yswolinsky - 4 years ago
Thanks Sivaram I do not agree fully with your analysis. But you always present your arguments in a logical and coherent manner. I do agree with the management issue, but I think you are underestimating Movado's moat.

Thanks again
batbeer2
Batbeer2 premium member - 4 years ago
These watch companies also face threats from cheaper brands (mechanical watches) from China. So far, companies like Movado have done ok but it all comes down to whether the Chinese (and others) can establish their brands.

You make some good points but:

1) Most of the Movado hardware is made in China; what advantage does a Chinese maker have ?

2) Invert. If you were a Chinese company would you build your own global brand and distribution network or would you consider MOV a steal at these prices ?

Having said that, the best of the bunch is SWATCH and that stock isn't expensive either.


- EDIT - Wasn't expensive the last time I checked which is a while ago it seems ;-)
Sivaram
Sivaram - 4 years ago


1) Most of the Movado hardware is made in China; what advantage does a Chinese maker have ?

2) Invert. If you were a Chinese company would you build your own global brand and distribution network or would you consider MOV a steal at these prices ?

Having said that, the best of the bunch is SWATCH and that stock isn't expensive either.


In regards to #1, I would say that the Chinese maker can still under-cut you. Even if the manufacturing costs are similar, they will still have lower corporate costs (e.g. their senior management probably costs 1/10th of what it does in America) and may accept lower margins. The risk for companies like Movado is that their margins would shrink. Instead of making 20% (I made up that number; not sure what Movado's number is) on each sale, they may end up with a 10% profit margin.

As for #2, I would say that the Chinese (or whomever) would be better off buying the established company (Movado in this case.)
yswolinsky
Yswolinsky - 4 years ago
I think Movado as part of their growth plan is trying to tap into the Chinese and Indian markets.

www.valuewalk.com

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