It has been quite a ride for long-time Tiffany & Co. (NYSE:TIF) shareholders over the last 36 months. You’ve seen TIF stock blow through $100 in late 2014 only to fall back into the $50s in 2016 and finally to bounce back in 2017 to within a whisper of $100 a second time.
While the company has certainly had its challenges in recent years, I believe its future, including a share price that stays above $100 for more than a couple of months, is definitely in the cards.
Here’s why.
Tiffany & Co.: The Rich Get Richer
Luxury retail isn’t dead after all. It seems America’s wealthiest individuals are very confident about the economy and in a mood to spend their cash accumulated through rising stock markets.
Goldman Sachs analyst Lindsay Drucker Mann upgraded TIF stock May 12 to a “buy” from “neutral” and raised its 12-month price target from $82 to $107 as a result of accelerating luxury sales and growing free cash flow.
The investment bank bases its opinion on data from a survey of 2,000 consumers, which shows the wealthy are more upbeat about the economy than less affluent individuals.
According to Mann, “This improvement is attributed to re-accelerating growth in consumer net worth driven by higher equity market values, with the benefits accruing disproportionately to higher-income consumers.” She also clarified that, “TIF offers unique exposure to a resurgence in luxury, driven by improved international tourist spending and a firming high-end U.S. consumer.”
As long as America’s wealthy are in a spending mood, TIF stock is going to do just fine.
Farther Down the Road for TIF
Up 21% year-to-date, Tiffany & Co. shareholders are happy — for now. But what happens when the markets correct, and the bull run comes to an end? TIF stock will get stopped dead in its tracks.
Drucker Mann believes the company can deliver higher free cash flow through lower product costs (diamond prices lower these days) and better inventory management (turning inventory more frequently). Both of these seem very doable in my opinion.
In fiscal 2016, Tiffany’s gross margins were 62.2%, 150 basis points higher than a year earlier. In fiscal 2017, it expects gross margins to continue rising due to lower product costs along with higher revenues and price points.
The analyst thinks the additional free cash should be put to use buying back TIF stock. At its May 19 closing price of $92.92, that’s 23.5 times its 2017 earnings estimate of $3.96 per share, 21.3 times 2018 earnings-per-share and 19.5 times 2019 EPS. If you take out the highest price-to-earnings ratio and lowest P/E over the past five years, you get an average five-year P/E of 22.4.
If Tiffany & Co. hits those estimates and its stock stays at the same price over the next three years, it’s getting a good deal for its shares. However, assuming its business remains strong, I see it hitting $100 in 2017 and quickly moving to $110 or higher in 2018. If it hits $120 by the end of 2018, it will be trading at almost 28 times earnings which would no longer be a prudent use of its free cash flow in my opinion.
During fiscal 2016, it spent $184 million buying back 2.8 million shares at average price of $65, giving it a 43% return on its investment through May 19. I doubt it would generate the same return buying shares in fiscal 2017.
I’d prefer to see it eliminate debt.
Currently, it has net cash of $107.4 million ($985 million in cash and $878.4 million in long-term debt). Rather than repurchase shares, I’d like to see Tiffany add to its net cash position over the next 2-3 years. A fortress-like balance sheet is always a good thing when interest rates are rising.
Bottom Line TIF Stock
Tiffany & Co. is the only place I will go to buy my wife jewelry. I like how they’ve modernized the product offerings while still maintaining the quality. I also like the fact that Michael Kowalski, former CEO and current chairman, is running Tiffany’s business until they can find a new CEO after the former CEO was fired only 22 months into the job.
Kowalski was CEO for 16 years until he retired in March 2015. He had a lot to do with its success in the 21st century. I’m sure the company will take its time finding the right person to take it to the next level.
Not everything is perfect about Tiffany, but you can be sure Kowalski will do his best to make it more profitable than it already is.
As retail stocks go, Tiffany, in my opinion, is one of the buy-and-hold variety. It’s timeless like many of its products.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
