AABP Award 728x90

Tiffany jewelry glitters, but the stock looks dull


Dear Mr. Berko:

I think I’d like to buy 100 shares of Tiffany & Co., the large jewelry store, for several reasons. I think the stock looks like a bargain at $31.90, and I think it could double in the next few years as the company continues to expand. The second reason is that my grandfather bought my grandmother’s wedding ring from Tiffany’s in New York in 1902, and my wife now wears that ring. The third reason is that we own several pieces of Tiffany glass, which is the trademark of this company. We thought that owning a 100-share certificate would bring us even more good luck. What do you think?

W.W., Syracuse, N.Y.

Dear W.W.:

I think you might have the right facts but in the wrong place, and I think $3,200 is an expensive price to pay for a good luck token.

Charles Lewis Tiffany founded the prestigious jewelry company that bears his name in 1837. Tiffany and his son, Louis Comfort Tiffany (1848-1933), did not get along. They had divisive differences of opinions, which were not just business related. Louis Comfort, originally a painter, began to study the chemistry and techniques of glassmaking when he was 24. (If you’re ever in Orlando, Fla., you ought to visit the Morse Museum, which has the most extensive collection of Tiffany art in the world.) Charles and Louis were as different as cheese and chalk and did not share the same business interests.

I wouldn’t be a buyer of Tiffany (TIF-$31.90), the internationally renowned designer, manufacturer and retailer of jewelry for those who revel in and practice conspicuous consumption. TIF’s 51 U.S. stores produced about 47 percent of the company’s $2 billion revenues in 2004. Direct marketing accounts for 10 percent of revenues, Asia-Pacific and Europe (108 stores) contribute 38 percent, and specialty items generate 5 percent of sales. In 1987 (with prior heavy financing from a group of Arab business people), the stock went public at a split-adjusted price of $2 a share.

In all fairness, TIF is a “classy” company, and its unswerving maintenance of quality and value (both of which are subjective measures) is the stuff from which legends are made. TIF’s revenues have tripled in the past decade, operating margins have nearly doubled to 22 percent, net profit margins have increased threefold, and book value per share surged from $1.66 to $11.45 in 2004. But even with the company’s intention to open seven to 11 new stores each year, I’m having a hard time becoming “investment-positive” with its common stock.

I’m concerned about the Japanese market (24 percent of sales), which is showing signs of rigor mortis due to a sluggish economy, with a 6 percent drop in 2004 revenues. TIF might scale back expansion plans there. I’m also concerned about DeBeers’ venture with LVMH Moet Hennessy Louis Vuitton to open exclusive retail digs in Manhattan. This could adversely affect Tiffany’s flagship New York City store and create harmful pricing pressures. Finally, I’m concerned that the company’s products, which are becoming so easily accessible, will lose their cachet, that the Tiffany brand name could become less exclusive, and that these factors together could diminish a buyer’s enthusiasm for TIF’s more expensive baubles, bangles and beads. In fact, I think they already have.

On the plus side, TIF has an enormous quantity of cash and a strong per-share cash flow of $2.10 on 148 million shares outstanding. The company’s $380 million of long-term debt represents 20 percent of capital ($200 million of which comes due in 2009) and there are no preferred stock shares or convertibles outstanding to muddy the waters.

However, higher diamond and precious metal prices have wounded TIF’s margins. Because it’s difficult to pass most of the increases on to the consumer, Tiffany’s earnings for 2004 might come in lower than expected. This could be reflected in the company’s current $31.90 price, which is down from $45 a share earlier last year. I don’t see a turnaround this year or in 2006, and I can’t see anything in the near future that would encourage me to own the stock, which might be a little too pricey at 22 times earnings.

So wait six months and then write me again.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

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