Inside Wall Street: Tiffany looks like a gem of a stock

Looking for a holiday bargain? Think Tiffany (TIF). Shares of Tiffany, to be precise. Yes, this global leader in high-end jewelry is one bargain you shouldn't miss.

With the weakened economy, you would think the stock of the No. 1 designer, maker and retailer of diamonds and other pricey gifts such as rings and watches, would be doing poorly. Indeed, it did do miserably -- last year and in the first half of this year. But the outlook for Tiffany's business in 2009's fourth quarter and for all of 2010 has brightened, promising to be one of the bang-up surprises in retail, assert some pros.

The result: The Tiffany's stock remains underpriced.

That might seem like a stretch, considering that after tumbling to a 52-week low of $23.91 on July 7, Tiffany has since taken wing, flying to a 52-week high of $43.89 on Nov. 25. Though it's now still at $40, the smart-money crowd believes the stock has more upside power, and they're betting Tiffany could hit $50.

Extensive Global Reach

The research team at Zacks Investment Research puts a 12-month price target of $47 a share, based on its earnings forecast of $1.92 a share for fiscal year 2009 (ending Jan. 31, 2010) on projected revenues of $2.64 billion. For fiscal 2010, Zacks expects $2.20 a share on estimated sales of $2.85 billion. On Dec. 4, Zacks upgraded its recommendation on Tiffany to outperform from neutral.

"Tiffany is well-positioned to deliver robust sales and earnings growth by leveraging capital investments made in the past several years," says Zacks. With its global leadership in the world jewelry market, the company should benefit from its increased geographic reach once the economic recovery gets going more strongly, notes Zacks.

Luxury-goods retailers suffered sharp U.S. sales declines during the recession. But partly offsetting that for Tiffany was the strength of its overseas markets. Its 100 stores in Asia account for 32% of revenues. In North America, Mexico and Brazil, it operates 90 stores that generate 56% of sales. And in Europe, its 25 stores account for 10%. Tiffany also operates a diamond wholesale business that accounts for 2% of total sales.

Lower Prices, Fatter Margins

In another move that's helping to blunt the downturn's impact, Tiffany has resorted to an unprecedented and novel (for Tiffany) strategy: It started catering to relatively lower-end customers by concentrating more on smaller store sizes that sell selected jewelry and gifts with lower prices but fatter profits margins. By simultaneously cutting back its cost structure, Tiffany has so far succeeded in protecting its shrunken revenue base.

"These initiatives helped Tiffany post improved 2009 third-quarter results, prompting management to raise earnings guidance," says Zacks.

"Tiffany is positioned well into the holidays," says retailing analyst Edward Yruma of KeyBanc Capital Markets, who rates the stock a buy, with a 12-month price target of $50 a share. Tiffany has several near-term and long-term catalysts that, he says, make it "one of our favorite names within our coverage."

He points out that Tiffany has a big opportunity to expand gross margins in 2010's first half as same-store comparisons start to improve significantly, in part because of a budding recovery in the luxury-goods sector. And "we think Tiffany also has prospects of gaining market share over the long term with its strong brand and as consolidation in the industry takes hold. The company's move to maintain pricing integrity, or avoid big price discounts, should help Tiffany as the jewelry market begins its slow recovery,"notes Yruma.

Rivals Are in Disarray

"Tiffany should remain a core holding for investors looking for a high-quality name with good growth prospects," the KeyBank Capital Markets analyst advises. Although the stock trades at a premium to its peers -- based on its 18.6 times his estimated 2010 earnings -- the valuation is reasonable, says Yruma, "given the potential for earnings upside, unit growth opportunity and strength of the brand."

Of course, competition and limited pricing power will make things tough in the near term, as financial disarray among Tiffany's rivals continues. But Yruma figures pricing should be less severe than it was in the fourth quarter of 2008. Despite the elevated pressure as bankruptcies and liquidations roil the industry, over the long term the ugly situation will favor Tiffany, as the number of competitors decline.

Thus far, Wall Street remains split over Tiffany, with 10 of the analysts who track it recommending a buy and 10 rating it hold or neutral, according to Bloomberg. But no major analyst recommends dumping the stock.

"In our view, a weak dollar and improving economy certainly suggest Tiffany could potentially be $50 a share, if the backdrop stays in place, all else being equal," says David A. Schick, analyst at investment firm Stifel Nicolaus (it has done banking for Tiffany), who rates the stock a hold.

Tiffany's largest institutional stakeholder is activist investor Trian Partners, which owns 7.9% of the company's 124 million shares outstanding. Trian has played a major role in the consolidation in the restaurant and retailing business. Some investors are closely watching Trian's interest in Tiffany's stock. If it increases its holdings, that would be another positive sign for Tiffany shareholders.

Meet Gene Marcial at the World Money Show Orlando, Florida, Feb. 3-6, 2010 at The Gaylord Palms Resort.

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