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In Search of Shine at Tiffany's

To see if it will make a sparkling addition to your portfolio, take a closer look at the fine jewelery retailer.

Something old, something new.

I've always liked the slogan. It describes

Tiffany & Co.

(TIF) - Get Tiffany & Co. Report

to a T. In fact, it describes my other favorite value investments pretty well, too: sharp products and new markets grounded in a tradition of solid fundamentals.

Few deny that the name Tiffany brings a sparkle to the eyes of jewelry aficionados worldwide.

People crave the refined shopping experience, and when one of those robin's-egg-blue catalogs of dreams arrives in the mail, it gets opened right away. Right?

There's no doubting Tiffany's cachet among upscale buyers, where everything from six-figure necklaces to $100 baby spoons walks out the door with generations of satisfied owners.

But Tiffany isn't just for the upscale buyer. Several years ago, the company began appealing to the masses with an affordable line of silver products done in its same great designs.

Now we're talking prices in the hundreds, not thousands, of dollars, and we're catering to a more mainstream, aspirational market.

That move boosted revenue and profits initially, but some wonder about the long-term effects.

Click here for the video version of this story from Jennifer Openshaw.

So with that backdrop, let's look at Tiffany not as just a shiny adornment to your ears or ring finger but as an investment to shine in your portfolio.

Here are my points and counterpoints.

Points:

  • Exclusive brand.Few would argue that the brand is the strongest asset. Tiffany has maintained its brand promise with unique, elegantly simple design and superlative, special designers.With one of the most recognizable names in the business, brand strength is wide enough to appeal across markets -- high-end and midrange buyers, U.S. and international markets -- but narrow enough to bring consistently high margins and resist competition. The company enjoys an unusually wide protective moat for the industry.
  • Excellent operating cash flow.Operating cash flow far exceeds expansion needs. Tiffany is in a unique situation -- its strategy is to not add too many stores. That's a big plus compared with most retailers.
  • Strong international presence.As strong as Tiffany is in the U.S., the overseas potential is huge. The company is well positioned to take advantage of international growth and the weak dollar. Of the 17 planned new stores for 2007, 10 are overseas. Overseas sales account for about 40% of total business. Japan is about half of that, so Tiffany is a particularly strong play on a Japanese and Asian consumer recovery. There are four stores in China already; expansion in that country will be interesting to watch. International markets are the most promising growth path for sales and especially profits. I like to find ways to play international growth while keeping my capital at home; this one works.

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Counterpoints:

  • Strategic struggle: brand vs. growth.Tiffany needs to walk a fine line between cheapening the brand to pick up sales and forgoing growth to preserve the brand and resulting profits. This is perhaps more of a risk than an absolute negative, but it bears watching.
  • Poor control over supply costs.Most Tiffany products are made of gold, silver or diamonds, and increases in commodity prices add cost pressure. Fortunately, good design and a strong brand have allowed Tiffany to pass increases on to the consumer.
  • Price. Like the product, the stock in the high $30s might be a bit expensive. It has been stuck in a $20-$45 trading range for seven years. The price-to-sales ratio exceeds 2, and the P/E ratio exceeds 20 -- a bit aggressive for a company growing at about 10%.But same-store sales are increasing at about 6%, and the company does pay a small dividend and has repurchased some shares.

Bottom line: Tiffany & Co is a pick. Although expensive, it's a good business with lots for the value-oriented investor to like -- brand, cachet and a business model eschewing the "big is best" mentality.

Brand, customer experience and international exposure all rate higher than closest competitors

Blue Nile

(NILE)

and

Zale

(ZLC)

. Clearly, Tiffany is the

Nordstrom's

(JWN) - Get Nordstrom, Inc. (JWN) Report

of the jewelry trade.

On price dips, I'd be adding Tiffany to my investment outfit.

Jennifer Openshaw, a passionate advocate for helping Americans improve their finances and build their personal fortunes, is CEO of

The Millionaire Zone and America Online's personal finance editor. In addition to appearing regularly on TV shows such as "Oprah" and "Good Morning America" and on CNN, Openshaw is host of ABC Radio's "Winning Advice" and serves as an adviser to some of America's top corporations. Her new book,

"The Millionaire Zone," will hit bookstores in April 2007.