The recent risk-off sentiment has dragged down equity valuations and created a lot of buying opportunities. In this article, I will run you through a quick analysis on two stocks with attractive valuations and then examine the likelihood of solid upside potential.
Tiffany & Co. (TIF)
TIF has recently touched its 52-week low of $53.46. At the current price of $55.28, the stock is trading at 14.8x the current fiscal year's estimated EPS and 8.8x the LTM EBITDA. I believe the price is cheap and investors should consider building up positions for the following reasons:
- Taking the EPS growth into consideration, the stock is trading at a 3-year expected PEG of 0.83, indicating a discount to its growth prospect.
- In my last article, I have run a comparable company analysis. Given TIF's mediocre financial performance relative to its global peers, it makes sense that TIF could trade at a 10%-20% valuation discount to the group averages. However, TIF's solid emerging market presence and established brand equity are what some of its peers envy. Thus I believe the valuation discount should be no more than 10%. Based on that, I have performed the relative valuation, and the model yields a stock value of $64.57, representing 17% upside. Even with a less realistic 20% valuation discount, the estimated value is $57.18, which is still above the current stock price (see below):
- There have been two recent insider buying transactions for the stock executed by one of TIF's directors at about $54. Although the total value of $108,430 is not a significant amount, insiders buy the stock only because they are confident about the company's prospects.
- According to the chart below, it appears that there has been strong technical support between $53 and $58 over the past 12 months.
Click to enlarge
- Of the 23 analyst ratings for the company, 4 are strong buys, 6 are buys, 12 are holds, and 1 is underperform. The mean target price is $69.37, indicating 26% upside potential. Oppenheimer in April reiterated its outperform rating for the stock and raised the target price from $75 to $83.
- The stock has a dividend yield of 2.3%
Abercrombie & Fitch (ANF)
ANF has touched its 52-week low of $31.27. At the current price of $32.16, the stock is trading at 9.3x the current fiscal year estimated EPS and 6.1x the LTM EBITDA. I believe a good entry point has emerged for the following reasons:
- The company's Asian expansion and growth story remains intact and attractive.
- Taking the EPS growth into consideration, the stock is trading at a 3-year expected PEG of 0.36, indicating a substantial discount to its growth prospect.
- The U.S.-listed fashion apparel retailers have an average current fiscal year P/E and an average LTM EV/EBITDA of 13.1x and 6.6x, respectively. On the P/E basis, ANF is trading at a substantial discount of 29% to the group average. Given ANF's strong growth prospect, such deep discount is likely overblown.
- One of ANF's directors recently bought 10,000 shares at an average cost of $35.43, suggesting insider confidence in the company.
- According to the chart below, there is likely a technical support at the current price level.
- Of the 33 analyst ratings for the company, there are 9 strong buys, 4 buys, 18 holds, and 2 underperform. The mean target price is $50.23, indicating a decent 56% upside potential. UBS in May upgraded its rating for the stock from neutral to buy and raised the target price from $51 to $66.
- The stock has a dividend yield of 2.2%.
Tables are created by author, charts are sourced from Bloomberg, and financial data is sourced from company 10-Q, 10-K, press release, Yahoo Finance, YCharts, Wall Street Journal, Thomson One, Bloomberg and Morningstar.
