Why Tiffany Is A Sell
Carlson Capital is an alternative asset management hedge fund that was founded in 1993. The firm has in excess of $13 billion in assets under management, with its client list consisting of pooled investment vehicles and corporation. Carlson deploys capital in publicly-traded equities, fixed income, and hedging strategies.
Carlson makes targeted bets to try and beat the broader market, but recent 13F-based returns have greatly underperformed the market. Carlson’s $3.8 billion US equities portfolio consists of 135 stocks, the largest of which is jeweler Tiffany & Co. (TIF).
Should investors follow this major hedge fund into Tiffany stock?
Business Overview
Tiffany is a manufacturer and distributor of various goods in the jewelry category. The company sells high-end watches, diamonds, leather goods, and crystal, among others, in its 300+ retail stores. The $14.8 billion market capitalization company employs more than 14,000 people worldwide.
Tiffany is in the process of being acquired by LVMH (LVMHF) in a deal worth $16.2 billion, or $135 per share of Tiffany stock. LVMH owns some of the world’s most successful luxury brands, including Hennessy, Louis Vuitton, Christian Dior, and Bvlgari, among others. The deal is expected to close this year, but the merger date continues to be pushed back due to the ever-evolving COVID-19 situation. Tiffany shareholders have already approved the transaction, and shares trade meaningfully below the buyout price of $135. Therefore, it is still worth asking whether investors should buy the stock on the possibility of a rapid gain.
Tiffany reported first quarter earnings in early June, for the period ending April 30th. Net sales plummeted 45% year-over-year to $556 million, attributable to the closure of the company’s retail stores across the world. The company has since reopened many of its stores, but the damage to first quarter earnings was significant. The company posted a net loss of $65 million, or $0.53 per share, down from a profit of $125 million and $1.03 per share, respectively, in the year-ago period.
We currently expect $2.50 in earnings-per-share this year, although we note that we see steady-state earnings power at $4 per share, accounting for the transitory impact of COVID-19 on this year’s results.
Future Growth
Tiffany has grown earnings-per-share fairly steadily in the past decade, although a decline in earnings in 2019 crimped its 10-year growth rate to come in at 4.3%. We see Tiffany’s posting 6% annual earnings-per-share growth – assuming it remains a standalone entity – which will be driven by new stores, higher comparable sales at existing stores, as well as continuous improvement in the company’s digital channels. Higher revenue should afford Tiffany’s the ability to leverage down fixed costs such as back office support, supply chain costs, store rent, etc.
Given the pending buyout situation, Tiffany’s valuation is quite high by historical standards, as well as against our estimate of fair value. We see fair value for Tiffany’s at 20 times earnings, while shares currently trade for 30.4 times our earnings power estimate of $4 for this year. As such, we expect a powerful headwind to total returns in the coming years if the buyout does not go through as planned.
Given the high valuation, the stock’s dividend yield is also somewhat low by historical standards, coming in at just 1.9% today. While we see the dividend as safe, the prospect for Tiffany becoming a strong income stock is fairly remote.
Final Thoughts
While we like Tiffany’s strong position in its market, as well as its easily-recognizable brand globally, the valuation of the stock has soared on buyout news. Carlson Capital appears to be betting that the buyout will go through, and hopes to capture the spread between today’s share price of $121 and the buyout price of $135.
We see Tiffany’s valuation as far too high and therefore, total returns will be around zero for the coming years if the deal does not go through. As such, we rate Tiffany a sell.
Disclosure: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities.
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Thanks for an interesting and educational cautionary analysis.