Thursday, December 01, 2011

Fossil Can Make Your Portfolio Come Alive

There are plenty of people in emerging markets who are delighted to buy watches to let the world know about their newly acquired wealth. If that growth is higher than analysts expect, then investors might be able to profit from investing in leading watchmakers such as Movado Group (MOV) and Fossil (FOSL). But is the industry attractive and growing? And are these two stocks priced low enough to create a margin for error? 

The watch industry has different segments based on price ranges. At the very top are Exclusive watches in the $10,000 and above category --  its Concord brand is a leader there. And at the bottom are mass market watches that sell for less than $55, according to Movado's 2011 10K.

Movado is a leader in the so-called premium category -- these are quartz-analog watches that sell in the $500 to $1,499 range. Made mostly in Switzerland, premium watches have gold or stainless steel finishes. Movado competes with Gucci, Rado and Raymond Weil.

Fossil is similarly well-positioned in the higher-price ranges. And despite competition from cell phones that give people the time of day wherever they may be in the world, people appear to be gobbling up these watches because they show off the newly acquired wealth of the wearers.

Movado blew through earnings expectations when it reported earnings Thursday. Analysts were expecting an 8.5% sales increase to $133.4 million -- but it reported 16% growth to $143 million. Analysts had forecast EPS of $0.43 per share -- but Movado reported adjusted EPS of $0.65 cents a share -- a whopping 22 cents more than expected. Behind the growth was strong demand growth for Movado watches.

Fossil reported much faster third quarter growth on November 8th. Fossil's revenues rose a whopping 22.7% to $642.9 million -- $700,000 more than analysts expected. And its EPS of $1.09 were six cents above analysts' expectations.

But all was not well with Fossil. The strong dollar has led to higher watch prices and this has reduced demand from consumers in recession-hit economies. The result is that Fossil cut ist earnings outlook by three cents a share to a range from  its $1.75 to $1.78 -- that makes analysts' $1.78 a share target look tougher for Fossil to hit, according to Reuters.

So here's what the investment choice between Movado and Fossil boils down to:
  • Movado: growing, unprofitable; fairly expensive stock. Movado sales have risen 9.3% in the past 12 months to $427 million while it lost $10 million. Its PEG (where a PEG of 1.0 is considered fairly priced) of 1.11 is pricey on a forward P/E of 19.4 and expected earnings growth of 17.4% to $0.81 in fiscal year 2013.
  • Fossil: fast growing, wide margins; fairly price stock. Fossil sales have increased 31% in the past 12 months to $2.4 billion, while net income has soared 83% to $273 million – yielding a slim an attractive 11.7% net margin. Its PEG of 0.96 is slightly under-valued on a P/E of 21.4 and expected earnings growth of 22.2% to $5.53 in 2012.
If you think that the last 12 months are good predictors of the future, then you should invest in Fossil because it is enjoying rapid growth, wide margins, and trades at an attractive price. By contrast, Movado has been growing more slowly, losing money, and is over-valued.
However, the predictions of future results for both companies suggest that Fossil is likely to stumble while Movado's upward momentum is going to continue. I would give the edge to Fossil because its past performance suggests that it has a good chance of blowing through lowered expectations.


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