Buy Signet On The Bounce

About: Signet Jewelers Limited (SIG)
by: Holmes Osborne

Signet is way oversold.

Normalized free cash flow is about 10% and less than 40% price to sales.

The dividend yield is 3.57%.

These metrics point to a cheap stock.

Jeweler Signet (SIG) got crushed last week when it missed earnings. The stock has been oversold and is cheap at this point. It sells at a free cash flow of 10% and less than 40% price to sales. Too cheap for a company of this quality. The stock is a buy.

The stock trades for $41.41, there are 51.91 million shares, and the market cap is $2.15 billion. Earnings per share (according to Yahoo) are a loss of $3.48. The dividend is $1.48 and the dividend yield is 3.57%.

Sales were $6.5 billion in FY 2015, rose to $6.7 billion in FY 2017, and fell to $5.9 billion in FY 2018. The market does not like falling sales on retailers. Earnings rose from $381 million to $486 million over that time frame. In normal times, free cash flow is around $200 million. So on today’ market cap, that would be a free cash flow yield of close to 10%. We like that.

On the balance sheet, there is $130.7 million in cash and $72.4 million in receivables. Payables are $339.6 million and debt $983 million. Not a bad balance sheet considering the free cash flow. S&P rates Signet’s debt BB+ and Moody’s Ba1. Both junk levels. I see some Signet debt, with a maturity in 2024, yielding north of 6.5%. I am considering buying the debt.

In the most recent quarter, released December 6, same stores sales rose 1.6%. GAPP earnings per share fell 74¢ a share. Non-GAPP earnings per share fell $1.06. The stock got crushed and fell from the low $50s to high 30s yesterday, before closing at settling in the low $40s.

Management gave guidance of sales ranging between $6.26 billion and $6.31 billion. If this comes to fruition, the stock will sell at a price to sale ratio of 34%, cheap for a jeweler. GAAP earnings per share estimates range between a loss of $7.40 and $7.70. Non-GAAP earnings per share range from $4.15 and $4.40. So on the low end of non-GAAP earnings per share, the stock trades at a price to earnings ratio of 10. Cheap. Tiffany’s (TIF) trades at a price to earnings ratio of 25.

Signet operates under the names: Kay’s, Zales, Jared, Piercing Pagoda, James Allen, Peoples, H. Samuel, and Ernest Jones. The company has experienced increased competition from internet sales and this has hurt the stock, for good reason. Signet has an online company, James Allen, to sell on the internet. In the most recent quarter, same stores sales were up 13.6% at James Allen, enough to stop the blood-letting. Total same store sales were up 1.6%. It’s for this reason that I find that the stock is a buy. This and the cheap valuation.

In this fiscal year, management has bought back 8.8 million shares worth $485 million, at an average price of $55.06. Too bad. Management should have gone out into the parking lot, taken lighter fluid, and burned about $120 million because that’s how much the stock has fallen from the average. That’s my knock on share buybacks. Great if you do at the bottom, dumb if you don’t. They would have been better off paying down debt and addressing internet concerns. Management sold off close to $700 million in receivables and bought back shares. Dumb.

According to the previous Quarterly Report, “Signet’s sales are seasonal, with the fourth quarter accounting for almost 40% of annual sales, with December being by far the most important month of the year”. This should help the cause.

Back in February, I wrote an article advising to not buy the stock but to buy the bonds. I was half right: The stock was $10 higher but the bonds have fallen too.

I think the stock is a buy at this point. I wouldn’t hold forever as I think the company will have challenges facing the internet. Still, with a 10% free cash flow yield, over 3.5% dividend yield, and trading at 34% of sales, I think this jeweler is too cheap. We are in at about $40.5 or so. If the markets ever stop falling 500 points a day, Signet could bounce off its bottom. The stock looks way oversold.

Disclosure: I am/we are long SIG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.