Comparing North America's 3 Largest Jewelry Stores Companies

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Includes: NILE, SIG, TIF
by: Joseph Cafariello

Summary

The Jewelry Stores industry is expected to outperform the S&P broader market significantly this and next quarters, substantially in 2015, and moderately beyond.

Mean/high targets for the 3 largest North American Jewelry Stores companies – Tiffany (TIF), Signet Jewelers (SIG), and Blue Nile (NILE) - range from 4% to 32% above current prices.

Find out which among Tiffany, Signet and Nile offers the best stock performance and investment value.

* All data are as of the close of Monday, November 3, 2014.

If your portfolio's performance has lost its shine, you might want to sparkle it up with some jewelry store stocks. Not only are we approaching the best season of the year for the industry, but the next few years overall look very engaging and promising.

Of course, investors need to recognize that as consumer discretionaries jeweler stocks carry more volatility, losing their glitter more than most during economic downturns as consumers postpone or even cancel expensive non-essential purchases.

As noted in the graph below spanning the recent market plunge from June 2007 to its bottom on March 9th, 2009, where the broader market S&P index [black] lost 55% and the SPDR Consumer Discretionary ETF (NYSE: XLY) [blue] fell 60%, the three largest North American jewelers - New York-based Tiffany & Co. (NYSE: TIF) [beige], Bermuda-based Signet Jewelers Limited (NYSE: SIG) [purple], and Seattle-based Blue Nile Inc. (NASDAQ: NILE) [orange] - lost 68%, 85% and 63% respectively.

Source: BigCharts.com

But as the economy improved and consumers felt more confident with their finances, two of the three jewelry store chains recovered beautifully, as depicted below. Since the economic recovery began in March of '09, where the S&P has gained 199% and the Consumer Discretionary fund XLY gained 320%, Tiffany has risen 460% while Signet has climbed 1,600%.

Oddly enough, where brick-and-mortar retailers have been losing-out to online retailers for many years, in the jewelry industry it was online jeweler Blue Nile that underperformed its brick-and-mortar rivals, rising only 75% during the recovery thus far. The reason is likely due to the nature of jewelry shopping, where buyers prefer to see and handle the pieces before purchasing them.

On an annualized basis, where the S&P broader market has averaged 35.18% and the consumer discretionary fund XLY has averaged 56.47%, Nile has averaged a lack-luster 13.24%, Tiffany has averaged a sparkling 81.18%, while Signet has averaged a resplendent 282.35% per year!

Source: BigCharts.com

If jewelry stocks perform as well as consumers feel about their finances, then we can expect the industry to continue glittering as the economy continues to improve, as tabled below where green indicates outperformance while yellow denotes underperformance.

Where the jewelry stores industry's earnings are seen outshining the broader market S&P's average earnings growth near term by a rate of 2.1 to 2.5 times, they are seen slowly settling into a more sustainable 60% greater growth rate over the next five years.

Zooming-in a little closer, the three largest North American companies in the industry are seen underperforming their peers across the calendar.

Oddly again, Nile is finally seen benefiting from its more cost effective online operations with superior earnings growth over the next five years.

Compared to the broader market, growth looks better for everyone as the S&P is for the most part seen growing slower than the jewelry industry, as tabled below.

One by one, all three of our top jewelers slowly begin matching and outgrowing the market, beginning with Nile this quarter (near-match), with Signet joining-in on the outperformance next quarter, and Tiffany coming around in 2015. By the longer term, all three are seen outgrowing the broader market's average earnings.

But there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?

Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.

A) Financial Comparisons

• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.

• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.

In the most recently reported quarter, Signet outshone the others in revenue growth while Tiffany did in earnings. Nile, however, grew the least in both, posting earnings shrinkage along with Signet.

• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.

Of our three contestants, Signet operated with the widest profit margin while Tiffany enjoyed the widest operating margin. Nile, though, contended with the narrowest margins.

• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.

In returns on assets and equity, Tiffany's management team returned the most on assets while Nile's team returned the most on equity by a substantial degree. Signet's and Tiffany's teams split the worst returns between them.

• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.

Of the three companies here compared, Signet provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, while Tiffany's DEPS over stock price was the lowest.

• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.

Among our three combatants, Signet has the cheapest stock price relative to forward earnings, company book value and 5-year PEG. At the overpriced end of the scale, Nile's stock is most overvalued in all ratios by a significant degree.

B) Estimates and Analyst Recommendations

Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.

• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.

Of our three specimens, Nile has the highest earnings percentages over current stock price for the current quarter, while Signet has them spanning to 2015.

• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.

For earnings growth, Nile is projected to deliver the greatest growth in the current quarter and over the next five years by a considerable degree, while Signet delivers the greatest growth next quarter and in 2015, after shrinking in the current quarter. At the slow growth end of the spectrum, Tiffany offers the slowest overall.

• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.

For their high, mean and low price targets over the coming 12 months, analysts believe Nile's stock has the greatest upside potential and greatest downside risk, while Signet's stock reciprocates with the least upside potential and least downside risk.

It must be noted, however, that Signet is already trading slightly below its low target. While this may mean increased potential for a sharp move upward, it may warrant a reassessment of future expectations.

• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.

Of our three contenders, Signet is best recommended with 2 strong buys and 6 buys representing a combined 72.73% of its 11 analysts, followed by Tiffany with 5 strong buy and 8 buy recommendations representing 52% of its 25 analysts, and lastly by Nile with 1 strong buy and 2 buy ratings representing 33.33% of its 9 analysts.

C) Rankings

Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.

In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.

The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.

And the winner is… Signet with a multi-faceted performance, outperforming in 14 metrics and underperforming in 6 for a net score of +8, followed by Tiffany, outperforming in 9 metrics and underperforming in 6 for a net score of +3, and finally by Nile left way down river, outperforming in 8 metrics and underperforming in 19 for a net score of -11.

Where the Jewelry Stores industry is expected to outperform the S&P broader market significantly this and next quarters, substantially in 2015, and moderately beyond, the three largest North American jewelry chains are seen outshining the broader market's earnings one by one as the quarters roll on.

Yet after taking all company fundamentals into account, Signet outshines them all given its lowest stock price ratios, highest trailing revenue growth, widest profit margin, highest future earnings over current stock price, highest future earnings growth, best low price target, and most analyst buy recommendations - handily winning the Jewelry Stores industry competition.