Do you know what time it is?
Tell me do you know?
Do you know what time it is? -- Kool Moe Dee
Chairman and founder Gerry Grinberg knows how to sell aspirational brands. During the 1960s, when most people were wearing $18 watches, Grinberg sold Piaget pieces for $1,000. Sales weren't especially strong until he placed a small advertisement in
The New Yorker
boasting that Piaget was the most expensive watch in the world. The rest is history and Grinberg became a legend in watch circles.
Movado currently has seven brands and will add Lacoste in 2007. The company's watches start at around $55 and fetch over $10,000 at the high end. The eponymous Movado brand typically sells for between $500 and $1,500. Among Movado's licensed brands are
and Hugo Boss.
There are few publicly traded companies in which to make apples-to-apples valuation comparisons. However, the valuation of an amalgam of companies with aspirational products, including Coach and
Tiffany & Co
, shows Movado is deeply undervalued.
Movado trades at a very reasonable 17 times 2007 projected earnings and at 1.04 times its growth rate. Compared to the "aspirational" collection that I assembled, Movado is at a 45% discount across a variety of valuation metrics. Factoring in a slightly lower growth rate than the assemblage, I came up with a price target of $29.25, a 41% gain from current levels.
You could have the cheapest stock in the world, but if there are no catalysts to get it moving, all you have is a cheap stock, not a good investment. Movado has several things going for it that could lift its share price in the coming year.
Movado enjoys strong sales at Macy's. The department store will be expanding as parent company
Federated Department Stores
will convert several stores including Kaufmann's, Filene's and Marshall Fields into Macy's, as part of its acquisition of May Department Stores. This should enable Movado to expand the number of high-performing retail partners.
Movado isn't relying solely on others to sell its watches and jewelry. The company currently has 27 boutiques with plans to add three more in fiscal 2007 (which ends in January 2007). Management has stated that once it has been operating 30 stores for one year, that business segment should turn profitable.
Along with the previously mentioned Lacoste brand, Movado will launch a Juicy Couture collection in the fall of 2006. Juicy Couture is known for casual but expensive fashions that are worn by celebrities such as Jessica Simpson, Beyonce and Brad Pitt. A new moderately priced Hugo Boss line is planned for a spring launch (and will be introduced at industry trade show Baselworld this week).
Premium and luxury watches have been in high demand lately. According to
, 2005 sales of luxury Swiss watches grew 14.5% domestically and 15.7% in Japan. Swiss timepieces are considered the finest-made watches in the world. Several of Movado's brands are manufactured in Switzerland. While global demand for spiffy watches is high, Movado is banking on the Chinese market to boost sales.
China is now the third-largest market for luxury goods. Goldman Sachs projects that the Chinese market will grow 25% annually per year for the next four years for high-end items. Movado believes that it can capture a significant portion of the market for premium watches as it will be priced under more expensive (and perhaps out of reach) brands such as Rolex. Movado hopes that its strong presence in the U.S. will be attractive to increasingly wealthy Chinese who often try to emulate Americans.
Gross margin, already in the 60% range, should continue to increase as its direct-to-the-consumer boutiques flourish and the Movado brand, which has higher margins than the company's average, continue to enjoy strength.
Movado is not widely followed on Wall Street. The company is expected by the five analysts who cover it to earn 36 cents per share in the fourth quarter of fiscal 2006 and $1.25 for the full year. However, you won't find a Goldman Sachs or Morgan Stanley among the group. Instead, you'll see Goldsmith & Harris and Morgan Joseph & Co. In fiscal 2007, the analysts forecast earnings of $1.45, a 16% hike. Sales are predicted to rise 12% to $529 million from $473 million. Movado reports fourth-quarter results on April 6.
As of the third quarter, Movado had some debt on its books. but it was a manageable 28% of equity. Half of the company's $89 million in debt is considered short-term or current portions of long-term debt. With $56 million in cash, Movado has more than enough to meet those current obligations.
Do keep in mind, this is not a heavily traded stock, with an average daily volume of just 90,000 in the past three months. Also, quarterly results will be reported next Thursday. Additionally, the Grinberg family, including Chairman Gerry and CEO Efraim, control 70% of the voting stock. I don't always like when management has that much control. In this case, I'm willing to let it slide due to the company's track record for execution. Movado has beat street estimates three quarters in a row and in 9 of the past 12. In the other three, it matched expectations.
The stock is not a favorite target of shorts, with just 4.5% of the float sold short. However, that percentage figure is the highest in its history, as is the actual number of shares short, at 850,000.
I believe Movado is an inexpensive way of capitalizing on the global growth of luxury goods. If my thesis and price target are correct -- a purchase of a few hundred shares now, and you or the Mrs. could soon be sporting the
Movado Vivo with white mother-of-pearl dial (see page 14.) It's not the world's most expensive watch, but it's something to which to aspire.
In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.
Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86,87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback;
to send him an email.