"Tiffany's 1Q12 results were 15% higher than our and consensus expectations, prompting a 14% upgrade to our EPS and a 16% rise in our target price (now $76). We downgrade TIF to Hold due to its strong performance year to date, which has brought the valuation to a 10% premium vs. other global luxury brands. We still like the TIF equity story; we realize the company is in a sweet spot, but the 22x FY12E and 19x FY13E PERs indicate the quality is already in the price," Deutsche Bank's analysts write.
Today's note is full of so much praise for the luxury retailer that you'd almost think this was an upgrade. Joe Weisenthal at Business Insider provides this helpful summary:
- The company is in the sweet spot of leverage to the strengthening U.S. consumer.
- It's benefiting from the weak U.S. dollar.
- It's one of the few totally free floating stocks in the luxury sector, so there's also a scarcity value.
- On top of that, it's one of the best plays on Asian/luxury so that, too, makes it attractive to U.S. investors.
- But it trades at 22 times earnings, and at a 10% premium to its peers.
But this is just the way analysts tend to speak about the companies they cover. They almost never become frank about the risks facing a company until those risks have already been realized. They depend on access to company executives to formulate their views, and presenting too negative of a case on a stock risks that access.
So let's take a closer look at those bullet points.
- The company is in the sweet spot of leverage to the strengthening U.S. consumer. Do you believe the U.S. consumer is strengthening? Consumer confidence has been contracting lately. Home prices are declining. Unemployment remains persistently high. This spot that Tiffany is in might not be so sweet.
- It's benefiting from the weak U.S. dollar. Are you confident that Europe will be able to resolve its sovereign debt and banking crises soon? If not, how many Swiss and Australians do you think will buy Tiffany's jewelry.
- It's one of the few totally free floating stocks in the luxury sector, so there's also a scarcity value. Translation: Lots of luxury brands are tightly controlled by large parent companies or family owners. So if you absolutely must buy luxury retail, you should buy Tiffany. Of course, there's no reason on earth why you or anyone else needs to buy shares of a luxury retailer.
- On top of that, it's one of the best plays on Asian/luxury so that, too, makes it attractive to U.S. investors. Japan is still reeling from the tsunami and its aftereffects. Banks are downgrading projections for Japan's economic performance. China's economy is highly leveraged and dependent on government-driven growth in construction and an inflationary export-driven monetary peg. The "best play" here might not turn out to be a winner.
In short, Tiffany may very well be a great company, with many advantages over other retailers. But if you fear economic softness in the second half of the year or 2012, some of these strong points appear to fall away.
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