Steven Russolillo of the Wall Street Journal claims that investors should avoid Tiffany (TIF, Financial) (source). Should value investors avoid it, too?
Some highlights of the article included:
- Volatility in Tiffany’s share price.
- The luxury retailer is feeling the pinch from the strong dollar, soft tourism sales and a difficult retail environment.
Reduction in Wall Street bonuses has a tendency to hurt Tiffany’s flagship Fifth Avenue store. The store contributes about 10% to Tiffany’s sales, according to the article.
(image source futronix.us)
- Further, same store sales are worse in the last three years.
As historical financial performance indicates the presence of a business moat, I will perform a brief review.
Tiffany’s financial numbers
Revenue and profits
Excluding the significant drop in profits in 2014, Tiffany still appears to earn itself a steady increase in profits in 2015.
The big dip in 2014 profits was certainly not due to weak sales but secondary to an "arbitration award." According to its 2014 page 31 of Tiffany’s 10-K (source), Tiffany had to pay roughly $480 million to Swatch Parties.
Further discussion of the litigation can be highlighted here:
Nevertheless, this is the primary reason why Tiffany’s profits declined in 2014. Further this is the company’s statement regarding the arbitration award (p.46 of 2014’s 10-K):
Profit margin
Excluding 2014, Tiffany has been earning 7 cents to 12 cents per dollar revenue. In 2015, it looks like the company earned 11 cents per dollar revenue, highest since 2012.
Free cash flow and growth
The owner’s earnings had been volatile for the past decade.
Nevertheless, the company has been able to steadily increase its dividend without requiring more debt and issuing a lot more shares.
Debt to equity and shares outstanding
Tiffany showed discipline when it came to the total dividend and share buyback payout ratio from its profits.
Book value and growth
The book value has steadily been increasing for the past decade.
Valuations
Price to earnings revealed that Tiffany is selling at premium at 18.8x compared to the Standard & Poor's 500 with 17.7x. Price to book value revealed similar findings.
Intrinsic value calculations
Price to earnings and book value applications: I used the current industry and S&P 500 valuation averages and multiplied with Tiffany’s current earnings per share and book value and retrieved the following intrinsic value calculations.
Simple multiple
I basically multiplied the digits 9 to 15 to the current earnings per share.
Capital asset pricing model (CAPM)
Determining the terminal and 10-year growth is difficult. As a result, I would rather average the last five years’ growth rate and the forecasted growth rate to arrive at my 10-year growth. For terminal growth, I would use 5%.
I arrived at the following calculation.
Whew. Maybe my 10-year growth rate was too conservative. But one must observe that I had only $2.80 free cash flow per share to begin with. Summarizing these values and calculating the percent upside and downside provided the following table:
These assumptions, as demonstrated in the table above, prove that my calculations are maybe too conservative on Tiffany. Nevertheless, excluding the recent myopic article by the Journal, I would still refrain from purchasing any Tiffany shares.
Happy investing!
