Thursday, May 19, 2011

Gingrichonomics: Should Tiffany Trickle Down to Your Portfolio?

Tiffany (NYSE: TIF) stock is on a tear. And with those at the top doing better than ever -- Notwithstanding 2012 Republican presidential candidate Newt Gingrich's up to $500,000 in unpaid Tiffany bills  -- there is an opportunity for the bottom 99% to get some of that trickle down effect. Can you profit by stocking up on Tiffany shares?

As gasoline prices have risen by $1.30 a gallon over the last year, the split between the top earners and the rest of America is becoming more pronounced. And when the prices of other items rise later in 2011 -- clothing will spike 10% to 15%, meat prices will rise 6% to 7%, and the USDA estimates that dairy product prices will increase 5.5% -- that gap will widen further. 

How so? Citi Investment Research reports that for those in the bottom 20% who make a median income of $9,846, 35.6% of their income goes to buy food and 9.4% to gasoline. Whereas for the top 20% whose median income is $157,631, only 6.8% goes for food and 1.9% for gasoline -- this leaves the other 91.3% for spending on other things.

And based on the $3 billion (2010 sales) Tiffany's most recent comment on its first quarter earnings report -- expected to be delivered next week -- it looks like some of that money is going for jewelry. On March 21, Tiffany reported that it expected 2011 sales to be up between 12% and 14%.

But there's one problem -- 24% of its 233 stores around the world are in Japan -- and Tiffany expects a "mid-single-digit percent decline" in those stores. As a result, Tiffany reduced its first quarter earnings per share estimate from 62 to 57 -- still two cents above analysts' estimates.

Still, Tiffany stock has been going gangbusters -- sitting near an all time high of $70.13 and yielding a market capitalization of $8.94 billion. And those shares have risen more than 37 fold since their initial public offering price of split-adjusted $1.82 on May 15, 1987 at a compound annual growth rate of 16.4%.

Tiffany stock is a barometer of the growing wealth at the very top of the economic pyramid. And with corporate profit having hit a record $1.68 trillion in 2010 while unit labor costs fell 1.5% and productivity rose 3.9%, executives enjoyed a 24% pay raise in 2010 -- even as workers are squeezed between lower wages and higher food, energy, and clothing costs.
But if those workers have any spare change, could investing in Tiffany give them a share of the trickle down effect? To think about that, we can look at its price-to-earnings-to-growth (PEG) ratio — a way to determine whether the value that the market assigns a stock is justified by the rate at which it expects the company’s earnings to grow. I think a PEG of 1.0 is a fair price, and anything below that is a bargain.

At a PEG of 1.60 Tiffany is a pretty expensive stock. Its P/E of 24 compares to earnings expected to grow 15% to $3.82 in 2012. So the biggest chance for an increase in Tiffany stock price would be the result of a positive earnings surprise.

But a look at its most recent five quarters' earnings surprises yields mixed news. On the one hand, Tiffany has exceeded analysts' estimates by an average of 13% over the most recent five quarters. On the other hand, this average masks wide variations by quarter -- in some, Tiffany was 4% over estimates and in others it out-performed by as much as 33%.

If the past is a prologue, then Tiffany could deliver a meaningful upside surprise when it reports first quarter results. Given its high valuation, any disappointment could be bad for the stock. If you think Tiffany will beat by a wide margin, this might be a good time to buy. Otherwise, consider it again after Tiffany plummets should its earnings disappoint investors.


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