Inside Wall Street: Tiffany's Stock Looks Like a Holiday Jewel

Gene Marcial's Inside Wall Street
Gene Marcial's Inside Wall Street

For those who wish to load up on a true Christmas stock, Tiffany (TIF) looks like a worthwhile holiday investment bet.

This global designer, maker and retailer of fine jewelry and other gift items went through the recession like it never happened. Not only did Tiffany's strong sales and earnings beat Wall Street's expectations but its stock has streaked from a 52-week low of $35 a share in early July to a 52-week high of $65.44 as of Dec. 21's close.

For the skeptics who would argue that the stock should wither and fall from its high altitude, Morgan Stanley's top analyst on Tiffany, Kimberly C. Greenberger, has a rebuttal: "Predictable, global growth is hard to find." So, she sees Tiffany's stock going higher.

And that predictable earnings growth is what makes Tiffany's stock sparkle. Despite strong sales in recent quarters, its stock remains undervalued, notes Greenberger, because it's trading at a discount to the luxury goods industry's price-earnings average. She has a price target of $70 a share, based on her earnings forecast of $2.78 a share for fiscal 2011 ending Jan. 31, $3.30 for fiscal 2012 and $3.85 for fiscal 2013. In fiscal 2009, Tiffany earned $2.04.

An Ability to Pass Along Higher Costs

What's behind Tiffany's continued success? Its global expansion and the opportunity to nearly double the number of stores in the U.S. is propelling yearly earnings growth. Overseas, this blue chip also going gangbusters. It can double its store count in Asia and Europe, too, over the next five to seven years, predicts Greenberger. Tiffany's sales in Europe, she notes, are still an early-stage growth opportunity for its "luxury within reach" offerings. In China, she expects Tiffany can boost its current 12 store count to 30 by 2015.

Back In the U.S., growth is also going great. Greenberger says opening 150 additional stores seems achievable, which implies a 7% to 9% unit growth over an eight-year span. One of Tiffany's strengths, the analyst notes, is its ability to pass along higher costs to consumers, given lower purchase frequency and its knowledge of pricing techniques.

Diamonds are forever, so they say, and at Tiffany, they're at the heart of the merchandise that pulls customers into its stores. Jewelry with diamonds accounted for about 48% of total sales in 2010. Other offerings that are also in great demand at Tiffany's counters are colored gemstones as well as gold and silver fashion jewelry.

"In Demand"

The strong results that Tiffany reported in November for the third quarter ended Oct. 31 were evidence of the company's predictable growth. It showed a 14% jump in worldwide net sales, in all geographic regions. That increase and high operating margins led to a better-than-expected 27% boost in net earnings from continuing operations.

"Simply put, the gross margin expansion proves that Tiffany's products are in demand," says Edward Yruma, analyst at KeyBanc Capital Markets, who rates the stock a buy. The 14% leap in revenues points to a continued U.S. recovery as well as the underlying international growth opportunities, he adds.

From all indications, Tiffany's opportunities for further growth aren't not just in the U.S., which accounts for more than 52% of sales. Asian and European sales are also popping as the retail jewelry industry consolidates and luxury shoppers reemerge worldwide.

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Tiffany's global appeal remains undiminished. "Globally, we believe Tiffany's strong brand is underpenetrated," says Marie Driscoll, analyst at Standard & Poor's. She believes lucrative expansion opportunities are still plentiful in Asia and Europe, including Eastern Europe. Like other analysts, she expects accelerated store openings through 2012. "These trends support our buy recommendation," says Driscoll, who has a 12-month stock price target of $67.

Evidently, the pull of Tiffany's name hasn't reached a peak. Despite its globally known brand, the company is still far from being overexposed in terms of store count and marketing. Tiffany has a total of only 225 stores worldwide, with most in the U.S., where 91 are located. So, management is determined to expand its reach and broaden its global growth opportunities.

And for investors seeking a Santa Claus stock, Tiffany could be a holiday jewel.

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