Former Harry Winston Parent Fails to Impress


Diamonds may be forever, but that truism doesn't always translate to the income statement. Dominion Diamond , the Canadian mine owner that until recently owned and operated the ultra-luxurious Harry Winston brand, released its fourth-quarter and year-end results to an unimpressed Wall Street. The newly reorganized company is the largest Canadian diamond purveyor, and one of the leading precious-stone companies in the world. The question is: Is the company better now as a pure mining play, compared to its time as owner of, arguably, the most illustrious name in diamond retail? Let's take a look at earnings and valuation for more clues.

Bye-bye, Harry
At the tail end of March, Dominion Diamond completed the sale of iconic retailer Harry Winston to Swatch for $750 million plus the company's existing $250 million debt load, for a total acquisition of $1 billion. Harry Winston is perhaps best known for its lending out multimillion-dollar pieces to celebrities attending awards ceremonies and parties. In addition to the typical jewelry lineup, the company also makes incredibly expensive watches.

The acquisition made sense for Swatch, as the Swiss company is the largest provider of timepieces, and surprisingly, one of the largest buyers of polished diamonds in the world.

This leaves Dominion as a diamond miner and wholesaler.

Winston-less operations
For the fourth quarter, absent of the Harry Winston retail operation, Dominion's sales increased 8% to just over $100 million. The gain was due to increased prices, while carat volume actually fell 3% year over year. Operating profits fell 12% from the year-ago quarter to $21 million, while EBITDA fell 6% to $45.3 million.

For the full year, results were more favorable than the fourth quarter's. Top-line sales grew 20% from 2011, while operating profit grew 27% to $47.7 million. Consolidated EBITDA hit $127.9 million -- a 10% gain from the prior year.

Looking forward, the company should book decent growth with the recent acquisition of the Ekati mine in Northern Canada. The company now holds 40% of the Diavik mine, and 80% of Ekati.

Valuation and the call
The new, slimmer Dominion Diamond failed to impress investors this week with its earnings, but the company still trades at a rich 25 times forward earnings. With 2012's EBITDA in mind, the company's enterprise value trades at nearly 12.6 times earnings. Capital expenditures have been high, given the cost of mining, and have prevented any steady, substantial cash flow in recent years.

For exposure to the glimmering industry, I would be more interested in Swatch, which trades on OTC markets as well as German exchanges. Swatch has a more reliable, steady business driven by watch sales, and generates strong cash flows year after year. As always, only invest in that with which you are comfortable.

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