Plenty of people in emerging markets are delighted to buy watches in order to let the world know about their newly acquired wealth. If that growth is higher than analysts expect, then investors might be able to profit from investing in leading watchmakers such as Movado (NYSE:MOV) and Fossil (NASDAQ:FOSL). But is the industry attractive and growing, and are these two stocks priced low enough to create a margin for error?
The watch industry has different pricing segments. At the very top are so-called executive watches, in the $10,000-and-above category – Movado’s Concord brand is a leader there. And at the bottom are mass market watches that sell for less than $55, according to Movado’s 2011 10K.
Movado is a leader in the “premium” category — these are quartz-analog watches that sell in the $500 to $1,500 range. Made mostly in Switzerland, premium watches have gold or stainless steel finishes. Movado competes in this area with Gucci, Rado and Raymond Weil.
Fossil is similarly well-positioned in the higher-price ranges. And despite competition from cell phones that give people the time of day wherever they may be in the world, people appear to be gobbling up these watches.
Movado blew through expectations when it reported earnings on Thursday. Analysts were expecting an 8.5% sales increase to $133.4 million — but it reported 16% growth to $143 million. Behind the growth was strong demand growth for Movado watches.
Fossil posted much faster third-quarter growth earlier this month. Fossil’s revenue rose a whopping 22.7% to $642.9 million, more than analysts expected. And its EPS of $1.09 was six cents above analysts’ expectations.
But all was not well with Fossil. The strong dollar has led to higher watch prices and this has reduced demand from consumers in recession-hit economies. The result is that Fossil cut its earnings outlook.
So here’s what the investment choice between Movado and Fossil boils down to:
- Movado: growing, unprofitable; fairly expensive stock. Movado sales have risen 9.3% in the past 12 months to $427 million while it lost $10 million. Its price-to-earnings-to-growth ratio (where a PEG of 1.0 is considered fairly priced) of 1.11 is pricey on a forward P/E of 19.4 and expected earnings growth of 17.4% to 81 cents a share in fiscal year 2013.
- Fossil: fast growing, wide margins; fairly priced stock. Fossil sales have increased 31% in the past 12 months to $2.4 billion, while net income has soared 83% to $273 million – yielding aan attractive 11.7% net margin. Its PEG of 0.96 is slightly undervalued on a P/E of 21.4 and expected earnings growth of 22.2% to $5.53 a share in 2012.
If you think that the past 12 months are good predictors of the future, then you should invest in Fossil, because it is enjoying rapid growth, wide margins, and trades at an attractive price. By contrast, Movado has been growing more slowly, losing money, and is overvalued.
However, predictions of future results for both companies suggest that Fossil is likely to stumble while Movado’s upward momentum is going to continue. I would give the edge to Fossil because its past performance suggests that it has a good chance of blowing through lowered expectations.
Peter Cohan has no financial interest in the securities mentioned.