Merger Deal Off, Tiffany Stock Faces Near Term Headwinds

TIF: Tiffany & co. logo
TIF
Tiffany & co.

Tiffany’s stock (NYSE: TIF) faces near term pressure. TIF stock is down 10% YTD with more weakness expected to come as Louis Vuitton scrapped its pending merger of Tiffany. YTD revenues are down 30% and are expected to remain suppressed for the rest of the year due to weak demand for luxury products. Lower demand will negatively impact its revenue growth rate-further pressuring its stock price.

Following a 10% rise since the March lows of this year, at the current price of $122 per share, we believe Tiffany’s stock has reached its near term potential. Tiffany stock has moved from $111 to $122 off the recent bottom compared to the S&P which moved 53% over the same time period.  Notably, Tiffany’s stock is down 10% in YTD 2020 as Louis Vuitton scrapped its pending merger of Tiffany while the company’s revenues have plunged nearly 37% YTD 2020. Moreover, the stock is up 25% from levels seen in early 2018, over two years ago. Tiffany stock seems to be fully valued as, in reality, demand and revenues will likely be lower than last year. Our dashboard ‘Why Tiffany Stock moved 25%? provides the key numbers behind our thinking, and we explain more below.

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Some of the stock price rise of the last 2 years is justified by the roughly 6% growth seen in Tiffany’s revenues from $4.2 billion in FY2018 to $4.4 billion in FY2020 (ending January). This combined with a 38% jump in net income margin from 8.9% in 2018 to 12.2% in 2020, and a 2.7% reduction in share count due to stock repurchases worth $684 million, helped the earnings per share basis swell 51%. Notably, Tiffany’s margin expanded as a result of steady revenue growth coupled with the company’s decision to internally manufacture its jewelry instead of outsourcing it to others.

Finally, a drop in Tiffany’s P/E multiple partially mitigated gains to its stock from an upbeat earnings trend. Tiffany’s P/E ratio fell from about 33x at the end of 2017 to 30x at the end of 2019. While the company’s P/E has now decreased to 27x, it seems to be fairly valued when the current P/E is compared to levels seen in the past years- P/E of 30x at the end of 2019 and 33x as recent as late in 2017. Though we believe there is a possible downside for Tiffany’s multiple when compared to levels seen over the recent years due to weak growth prospects, and the stock is unlikely to see much upside after the recent rally and the potential weakness from a recession-driven by the Covid outbreak.

How Is Coronavirus Impacting Tiffany’s Stock?

The Coronavirus crisis has hit the apparel industry hard, and Tiffany is no exception. Fading consumer demand, reduced discretionary spending, rising unemployment levels, and stay-at-home orders resulting in stores remaining closed continue to take their toll on the apparel industry. The effects of Covid-19 were clearly evident in the company’s Q2 2020 (ending July) earnings, with the company’s revenues plunging by 29% y-o-y to $747 million. However, Tiffany is one of the most recognized brand names in the luxury apparel market and, the company’s brand appeal and a diversified geographical business should help the company’s revenue to recover. Furthermore, the company has started re-opening its stores which should provide a boost to the company’s revenues as mall traffic returns to normal. Overall, we expect the demand to be lower in FY’2021 due to uncertainty resulting from the outbreak of coronavirus which leads us to believe that the stock is currently appropriately priced.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.

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