Following Thursday's quarterly earnings release, Tiffany (TIF) shares plummeted by ~7%, as EPS missed Street's expectation. Management attributed the miss to restrained consumer spending in the Americas and competitive discounting.
Tiffany is on track with its expansion plan in the emerging markets, such as Brazil and China. Although the company sees near-term decelerated pace from the extraordinary sales growth last year, substantial long-term growth prospect in those markets is intact. In my view, the current stock price at ~$58 is not far off (~10%) the fair value, but the sell-off indeed opens an opportunity to seize profit in the near term before the price returns to the fair level.
In this article, I will run you through my relative valuation analysis to determine the stock's fair value. I have picked 6 comparable public firms in the luxury sector. Except for Coach (COH), which is a US-listed firm, other peers are listed either in Europe or Hong Kong.
Firstly, let's look at the group's historical revenue and EPS growth:
TIF has the lowest 5-year compounded annual growth rate (CAGR) for revenue, which is at ~6.6%. However, its 4-year EPS CAGR of ~9.1% is above average. Prada was excluded from the above analysis, as dated financial information is not disclosed.
Then we will look at various profitability and cash flow margins for the group:
In terms of margins on EBIT, net income, and free cash flow, TIF's historical 5-year performance is below the group averages. TIF's EBIT, net, and free cash flow margins are ~17.2%, ~10.4%, and ~6.6%, respectively.
Lastly, let's see the 5-year historical ROE below:
Again, TIF's ROE performance is below the group average. However, TIF's ROE level is fairly comparable to its global peers, except for COH, whose ROE is substantially higher.
From the above comparisons, we can conclude that TIF's profitability and growth performance is below par. Thus the stock valuation will likely warrant a discount to the group level. Then I have the following valuation for TIF:
The fair stock value is calculated by weighting 4 different trailing-price-multiple methodologies. To reflect TIF's underperformance relative to the group, I assigned a 20% discount on each of the 4 price multiples. By multiplying the most recent financial metrics by their respective discounted multiples, I arrived at 4 different valuations. Then I gave EBITDA and earnings multiple approaches heavier weights (30% each), as they are more relevant valuation methods. Finally, the model yields a stock value of ~$64, representing a ~10% upside from the current price level.
More than a week ago, TIF was trading at that fair value level. I anticipate the stock will gradually return to that level in the near term and will then likely fluctuate around until investors can foresee any significant corporate or industry developments. Investors should consider buying now to catch the near-term ~10% upside potential.
Charts and exhibits are created by the author. Financial data is sourced from company 10-Q, 10-K, press release, Yahoo Finance, YCharts, Wall Street Journal, Thomson One and Morningstar.
Disclosure: I am long TIF.