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A marked upswing is evident in consumer confidence levels across the US as unemployment and inflation are the primary targets of current monetary policy. Analysts have raised several concerns regarding the consequences of a shift in policy but for now such a change appears to be a long shot as the targets for macroeconomic variables have not been met. Following these events, the economy is recovering. Yesterday's reports on housing prices and consumer confidence support the gaining momentum of economic recovery.

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Source: Trading Economics

In this context, the industries which are highly sensitive to general economic activity and consumer confidence in the economy are looking at improved prospects in the future. The watch industry is also looking at a similar improvement as the boost in consumers' disposable income is being reflected in their spending. The economic recovery is not only limited to the US. The global economy is also surging as the equity indices are showing strong bullish sentiments. The emerging markets are posting decent growth rates and this overall economic trend is supporting the industry across the globe. Movado Group Inc. (MOV) is among the smaller components of the watch industry with a market capitalization of $875.2 million and annual revenues of $505 million.

Industry Overview and Business Strategy

The watch industry is very competitive as the product is priced across a wide range and the industry comprises a number of players most of which are large companies. Due to the large size of the industry, a number of price segments persist. Movado's business strategy is to provide a quality product which is stylish and affordable at the same time. This is why most of the company's products range between $500 and $2,500.

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Source: Annual Report 2013-01

The above table shows the industry segmentation as conducted by the company in its FY13 annual report. The company's business strategy is clearly visible through this table as the company has no exposure to either ends of the spectrum. It aims to maintain a strong position in accessible luxury and moderate and fashion segments. A similar approach is visible in the company's revenue profile as the regional diversification appears to be the key factor.

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Source: Annual Report 2013-01

The above table shows the operating segments and sub-segments of the company and its contribution toward net sales. We see that most of the company's revenues come from international wholesale business and the retail business has remained a smaller part of the overall setup.

Stock and Financial Performance

The performance of the company over the past years has shown a substantial improvement as it incurred losses in FY10 and FY11 but showed a strong recovery in the following two years. Since the beginning of FY12, the company's stock price has shown strong appreciation.

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Source: YCharts

The above chart shows the change in stock price of Movado and Fossil Inc. (FOSL) since the beginning of FY12. The company's stock has outperformed its competitor by demonstrating an appreciation of 87.6% whereas Fossil has also shown a decent upward movement of 33.8% over this period. This performance of Movado reflects the improvement in profitability of the company which has occurred over the recent years.

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Data Source: Morningstar

The above chart shows the net revenues, net income and net margin of Movado since FY10. The company's revenues have shown a sizable growth over this period due to strategic partnerships which were pursued by the company. The net income has also turned positive and shown growth over this period. In the past three years, the company's revenue has shown an average growth of 13.1% whereas the industry's average top line growth for the period has been limited to 2.4%. In the first quarter of this year, the company is expected to comfortably beat sales estimates. However, analysts have shown concerns over the ability of the company to beat earnings estimates which will cause a short term dip in the stock price, providing a decent buying opportunity for the long run investors.

Comparative Valuation

The companies operating in the watch industry tend to have business models that are very different from peers as they aim to target different segments of the industry. In this situation, Fossil Inc. appears to be the closest publicly listed competitor of the company.

Data Source: Morningstar

The above table shows some key valuation statistics of Movado, Fossil and the overall industry. The table clearly demonstrates a strong undervaluation of the company with respect to its earnings, book value and sales. The company is not offering a high dividend but the payout can increase over the coming years. Going forward, new competitors are likely to emerge in the form of bigger players like Apple Inc. (AAPL) and Samsung (GM:SSNLF) as they introduce their new wrist products. Therefore, the company is facing strong near term threats but in the long run, I expect the company to come out strong because of the strength of its business model.

Conclusion

Keeping these factors in consideration, I recommend a hold stance for the company. This is because in the short term the company is expected to experience some strong risk factors which are likely to result in shrinkage of margins. On the other hand, the company is financially robust and the long run prospects of the company appear to be bright.

Source: Movado Subject To Near-Term Risks