Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies with a Low Beta. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Tiffany & Co. (TIF) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Tiffany & Co. (Tiffany) is a holding company that operates through its subsidiary companies. The Company operates in five segments: Americas, Asia-Pacific, Japan, Europe and other. The Company’s principal product category is jewelry, which represented 92% of worldwide net sales during the fiscal year ended January 31, 2014 (fiscal 2013). The Company offers a selection of TIFFANY & CO. brand jewelry. The Company also sells timepieces, leather goods, sterling silver goods (other than jewelry), china, crystal, stationery, fragrances and accessories, which represented, in total, 7% of worldwide net sales in 2013. The Company operates e-commerce enabled Websites in 13 countries. The Company produces jewelry in New York, Rhode Island and Kentucky, and silver hollowware in New Jersey.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$44.52|
|Value Based on 0% Growth||$26.10|
|Market Implied Growth Rate||12.03%|
|Net Current Asset Value (NCAV)||$10.49|
Balance Sheet – 4/30/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Tiffany & Co. qualifies for the Enterprising Investor but not the Defensive Investor. The company passes all of the Enterprising Investor’s requirements, but the Defensive Investor has concerns with the high price-to-earnings and price-to-book ratios. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities through a review of ModernGraham’s valuation of Coach Inc. (COH) and ModernGraham’s valuation of Ralph Lauren (RL). From a valuation side of things, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $2.31 in 2011 to only an estimated $3.07 for 2015. This low level of demonstrated growth does not support the market’s implied estimate of 12.03% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Tiffany & Co. (TIF)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author held a long position in Coach Inc. (COH) but did not hold a position in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.