Category Archives: Luxury goods

Tiffany’s even more dazzling 2Q11

August 28, 2011 By in Current Market Thoughts, earnings conference calls, Industry Analysis, Luxury goods, Recent Market Action, Retail, Stock ideas, Strategy Tags: , , , , , , , , , , 1 Comment

the results

TIF reported July quarter  results (like most retailers, the company’s fiscal year ends in January of the following calendar year) just prior to the opening bell on Wall Street last Friday.   The numbers were better than the stunningly good results of 1Q11.

Sales were up 30% year on year at $872.7 million.  Earnings per share, at $.69, were 33% higher than in 2Q10.  Remove non-recurring items–mostly the costs of moving the New York head office, however, and eps were up 58%, at $.86.  This compares with the brokerage house analyst consensus of $.70, with estimates ranging from $.64 to $.77.

TIF raised its full-year earnings guidance by $.20/share to $3.65-$3.75.  My interpretation of management’s (very brief) remarks about this lift is that, as the business looks now, TIF should easily surpass this figure.  The only possible sign of weakness comes from Europe, where comps were “only” up 12% on a constant exchange-rate basis.  But during a time of political and social turmoil, there’s no sense in their raising the guidance bar any further.

Makes sense to me.

stuff I think is worth noting

–TIF bought back 330,000 shares of stock during the quarter at an average price of $74.29.  Not necessarily the greatest trade ever, but it tells you management thinks the intrinsic value of the company is significantly higher than that.

–Comps (comparable store sales) were stronger in 2Q than in 1Q for all regions of the world except Europe.  High-end jewelry sold especially well.  Chinese customers outdid themselves.

–3Q-to-date is just as strong as 2Q.

–Dollar weakness played a role in boosting earnings from Japan and Europe.  There’s no easy way to figure out the exact number, but my back of the envelope guess is that eps would have been around $.08 less without a rise in the ¥ and the €.  I think the $ will be a secular weak currency and that’s part of the icing on the cake of the TIF story.  But I don’t think we’ll see a gain this big again soon.  We might even see some giveback in 3Q11.

–Capital spending plans remain unchanged at around $250 million, but TIF will open 17 new stores this year–one fewer in the US than previously planned, one in Europe.  Eight remain penciled in for Asia-Pacific.

–Thursday-Friday trading in TIF wasn’t what I would have expected.  Before the open on Thursday, jeweler SIG (every kiss begins with Kay; he went to Jared) reported stellar US results for 2Q11.  US comps were up about 12%.  Despite this hint that TIF’s results would be unusually good, TIF shares faded after an initial rise to close down about 1% for the day.  On Friday, post results, TIF was up by 9.3%.

Isn’t Wall Street supposed to discount information in advance?

details

US

US sales (51% of the business in 2Q) were up 25% year on year at $438.2 million.  Half that gain came from purchases by foreign tourists, led by Chinese visitors.  Comps in the Fifth Avenue flagship store, a mecca for foreigners, were up 41% vs 2Q10.

The biggest factor was higher price.  Statement jewelry at prices of at $20,00-$50,000 and $50,000+ were notably good sellers.  However, units were up for all categories selling for at least $250.  Only silver jewelry, at the lowest price points, didn’t come to the party.

Asia-Pacific

Sales were $173.2 million (20% of sales), up 55% year on year during 2Q in this region.  Comps were up 51%.  China and Korea were the strongest areas.

What can I say.  I thought the 31% growth in comps for 1Q were great.

Japan

Sales were up 21% to $142.5 million (17%).  Comps were +8%; the rest was currency.  Sales momentum was good throughout the island nation, and built as the quarter progressed.  Purchases by Japanese tourists in Hawaii and Guam, counted in US results, were also good.

Europe

For the first time, TIF is mentioning foreign tourists–China and Russia–as a factor in its fledgling European operations, although most purchases are still by locals.  At $101.3 million, sales were up by 32%.  Comps were up 11%; the rest was currency.  Unit volume increases were the biggest factor in growth.  The UK was good; the continent was better.

Other

TIF has an “other” business, which consists of wholesale sales to emerging markets where TIF has no stores plus trade in rough diamonds.  The total for 2Q11 was $17.4 million.  I haven’t included it in my percent-of-sales calculations.  It’s not big enough to move the needle.

the stock

Same idea as three months ago  …except my numbers have changed a little.

I think TIF can earn $4 a share in fiscal 2011.  My base case for fiscal 2011 is $4.75.  If we apply a 20x multiple to those figures, we get an $80 target based on this year’s results and $95 based on fiscal 2012.  In an uptrending market, the multiple would easily be 25x, implying a correspondingly higher stock price.

In contrast, in a bad market/economy, next year’s earnings might be flat at $4, or even down a bit.  Applying a 12x multiple gives you a price of $48 (at the absolute bottom in 2008-09, TIF traded at under 9x depressed earnings of $2).

At Friday’s close, then, the $25 of upside I think possible is almost exactly counterbalanced by $20 of downside if the economy goes mildly south.

As it turns out, even though I told myself (repeatedly) that I was going to let the force of the downtrend of the past month or so play out without my buying anything, I found myself replacing the TIF I sold at $76.50 earlier in the year at around $63.50 on the day the market hit 1106.  That tells you something about me; it also says I think the more bullish outcome is more likely.

To my mind, the key variable is not China, which I think will go from strength to strength, or the overall US economy, which I think will be a story of the differing fortunes of haves  have-nots (think Europe in the 1980s) that will aggregate into only modest progress.  The big issue I see is that US comps generated by US citizens have got to lose steam at some point.  As long as they don’t drop to zero, I think the stock will be ok.

The fact that TIF was a $58- stock just a handful of days ago suggests a certain level of anxiety on Wall Street’s part about retail names.  To me, this means that there may be a chance to add to the stock at lower prices than Friday’s.


bottom-up investing in a world turning top-down

August 26, 2011 By in Casinos, Current Market Thoughts, economics, Entertainment, Industry Analysis, Luxury goods, Recent Market Action, Retail Tags: , , , , , , , , , , , , , , 2 Comments

the old days

Europe…

I started looking seriously at non-North American stock markets in 1984, after six years researching a number of sectors in the US market.  At that time, UK and continental European investors used almost exclusively a top-down style.  That is, they used macroeconomic analysis to select the countries they were interested in.  They then either bought banks, on the idea that the loan portfolios mirrored the economic structure of the countries; or they ventured into other sectors based on their economists’ view on what would be the areas of greatest economic strength.

…vs. the US

This process stood in stark contrast to what American investors did–which was to select individual stocks, mostly based on firm-specific factors, but with a little industry or sector guesswork also thrown in.  In fact, Peter Lynch of Fidelity Magellan, the most successful investor of that generation, wrote in his first book that he really didn’t pay much attention to macroeconomics.  He just picked good companies.

continental Europe?

When I began to manage a global portfolio at a small firm in 1986, I was faced with the problem of continental Europe.  I had limited resources.  There were lots of countries, all with different customs, different politics and different attitudes toward investing.  But together they only made up 10% or so of my benchmark index.   I’d spend all my time looking at just them if I adopted the European approach.  So I decided to do what Americans do, just pick stocks, on a pan-European basis and hope I didn’t get hurt too badly.

Ten years of European integration–and stellar portfolio performance along the way–later, my “accidental” approach had become the new norm.  It has stayed that way since.

…or so I thought.

macro-driven analysis

I’ve been surprised over the past couple of weeks to be seeing reports that harken back to an earlier day when analysts drew conclusions about individual stocks from general economic analysis, and nothing much else.

Two stick out.

1.  According to press reports, Goldman cut its price target on TIF a few days ago by 13%, from $77 to $67.  2013 eps were clipped by 4%, from $4.60 to $4.40.  Why?  Slowdown in the overall US economy.  That’s it.  Macroeconomic weakness will translate into lower jewelry purchases.

We’ll get some new evidence when TIF reports a little later this morning.   But judging from last night’s results from more down-market jewelry company SIG (which you’d expect to be hurt more severely than TIF if consumers were pulling in their horns),  however, there’s no sign of slowdown yet.  SIG said same store sales in the US were up 12% year on year in each month of the July quarter, and up 12% as well for the first three weeks of August.

I’m not saying GS is particularly insightful about TIF, nor that what I’ve read (I haven’t seen the actual report) is internally consistent.  What strikes me is the methodology–that there’s no apparent attempt to find a metric more subtle than that GDP growth is slowing.

2.  Deutsche Bank recently declared that the growth days for the casino gambling market in Macau are over.  Why?  Imports of German luxury cars into China, which had been growing at close to a 50% annual clip in the first half of 2011, slowed to +22% in July.  Deutsche believes this means wealthy Chinese citizens are seeing their income squeezed by global slowdown and are cutting back on spending (again, I haven’t seen the actual report, but it has been widely covered by the Asian press).

But July was a blowout month for the Macau gaming market.

According to Deutsche, that doesn’t matter.  We’re already seeing now is a reduction in high-roller participation in the market, but it’s being disguised for now by a boost in visits by less affluent Chinese gamblers.  By yearend, Deutsche thinks the Macau market will only be growing by 20%.  Growth of a mere 10% is possible for next year.  Evidence for any of this??

That’s an awful lot of inference from a one-month dropoff in sales of imported automobiles.   Who knows?  …maybe this year’s models are ugly.  …or customers have run out of garage space and will pick up the spending pace when their new garage additions are finished.

This report really struck a nerve in Hong Kong, however.  The entire gambling sector fell, with some stocks off as much as 10%.  It hasn’t recovered to date.

premises and conclusions

It’s always possible that your conclusions end up being correct even though your reasons are crazy–or non-existent. I happen to think that both reports will end up being too negative.  But that’s not my point.

In my experience, good analysts visit stores, interview/survey customers, talk with suppliers and with competitors to build a bottom-up model of a company or an industry.  They have detailed factual knowledge of a set of companies that they then integrate into an industry view.  Then maybe they knock on the door of their firm’s economist to give empirical feedback about the house macroeconomic view.

In these cases, the flow seems to have been reversed.  An economist who deals at the highest level of abstraction seems to be dictating what analysts are “supposed” to be seeing.  There’s a risk that the house macroeconomic view acts as a set of blinders that certainly make the analyst’s job easier, but makes the results less valuable at the same time.  I hope this isn’t the start of a trend.

We’ll know more about TIF later on today.  And Macau gambling numbers for August will be out in a week or so.

 

 

Tiffany’s dazzling 1Q11

May 27, 2011 By in China, Current Market Thoughts, earnings conference calls, economics, Hong Kong, Industry Analysis, Japanese development, Luxury goods, Retail, Stock ideas Tags: , , , , , , , , , , 1 Comment

the results

TIF reported results for its 1Q11 (TIF’s fiscal year ends on January 31st of the following calendar year) before the New York market opened on Thursday, May 26th.  The company posted earnings of $.63 per share on revenues of $761 million.  This compares with per share profits of $.50 in the year-ago quarter on sales of $633.6 million.  The Wall Street consensus was $.57.

The report represents a 26% gain in earnings on a 20% advance in sales.  TIF’s performance for the quarter was considerably better than these strong comparisons suggest, however.  TIF posted a one-time tax benefit worth $.02 a share in last year’s first quarter; this year’s income statement had in it $.04 in non-recurring costs for moving TIF’s headquarters.  Ex these items, earnings were up 39% year on year.

In its conference call, TIF raised its full year guidance by $.10 a share, to $3.45-$3.55 (excluding $.19 in non-recurring moving charges).  A few days before the report, the company upped its quarterly dividend by 16%, from $.25 a share to $.29.

The stock made an odd little rally in the closing hour of trading on Wednesday.  It gained another 8.6% on Thursday.

the details

Yes, analysts had penciled in $.57 a share in earnings, based, I think, mostly on company guidance.  But I can’t imagine anyone was super-comfortable with the number.  The two big imponderables:

1.  How would Japan perform in the aftermath of the earthquake and tsunamis that occurred on March 11th north of Tokyo?  How many stores would be damaged by the resulting power shortages, and for how long?  Would TIF’s sales be hurt by an attitude of “self-restraint” (jishuku), i.e., postponement of consumption, in sympathy with earthquake victims?  If so, would that be contained to the Tokyo area or would it spread to the rest of the country?

When TIF reported 4Q10 results on March 21st, the company said it expected Japanese sales to be down by 15% year on year in 1Q11, reducing total company eps by about $.05.  …but who knew?   …and the company had already booked half a quarter of “normal” sales–would 2Q11 be worse?

2.  Would the US business slow?  After all, the prevailing sentiment on Wall Street has been that domestic unemployment is still high, job growth is lackluster and the overall economy is being hurt, possibly more seriously than expected, by high gasoline prices.  Maybe economic doldrums would have an adverse effect on TIF customers–not only aspirational buyers but the wealthy as well.

Japanese results were unexpectedly good

Instead of down 15%, Japanese sales (which accounted for 17% of total company sales in the quarter) were up by 7%.  This was due completely to a 10% gain of the yen vs. the dollar during the quarter.  Nevertheless, same store sales were only down by 3%.  The Osaka area was relatively unaffected.  Nationwide comps were +3% in February, -16% in March (implying to me that Tokyo-area sales fell by about a third during the month), +6% in April.  Jishuku may have also had some unusual effects:  sales in Guam and Hawaii, traditional Japanese tourist destinations, were up 30% year on year for the quarter.

TIF now thinks that, while Japan won’t be a source of strength this year, it won’t be a significant drag on the rest of the company, either.  Sounds reasonable.

to me, the US was a bigger positive surprise

I know sales of luxury goods are going very well, and I expected that TIF’s sales in the Americas ( 48% of the company) would easily be up in double digits.  But the 19% gain TIF achieved was considerably higher than I expected. Comparable store sales at the flagship store in NYC were up 23%, year on year; comps in the rest of the US were up by 15%.  High-end jewelry did the best, as has been the case for some time.  However, there was even some strength in the silver jewelry that TIF’s less affluent clients favor.  US sales growth was “solid from coast to coast.”  Comps got better as the quarter progressed.

the rest of the world continues to show amazing gains

Sales were up by 37% year on year in Asia-Pacific (23% of TIF’s total) thanks mostly to Greater China.  Currency accounted for 6% of that, and new stores another 5%.  But comps were up 26%, after a 21% year on year gain in 2010.  Wow!

Sales in Europe (12%) were up 25%.  Currency gains made up 6% of the increase, and new stores 4%.  But comps were up 15%, due mostly to strength in continental Europe, after a 14% increase last year.

the stock

I haven’t changed my mind about TIF since I wrote about the stock after the 4Q11 earnings release.  I still think the company can earn $3.75 a share this year and $4.50 or so next.  Applying a 20x multiple to these figures gives us a $75 target based on 2011 eps and $90 on 2012.  Applying 25x gets correspondingly higher figures.

One thing is different, however.  TIF is no longer the sub-$60 stock it was in March.

TIF has exceptionally strong management, a wonderful brand name, and it’s also in the right place at the right time.  So I think it will continue to be an outperformer.  I’m happy to hold the stock.  I’ve trimmed my own position a bit, though, mostly because of its size.  I’d be an eager buyer on weakness.


Bain Luxury Goods Worldwide Market Study: Spring 2011 update

May 9, 2011 By in Asian economic development, China, Current Market Thoughts, economics, emerging markets, Hong Kong, Industry Analysis, Luxury goods, Retail, Strategy Tags: , , , , , , , , Leave a comment

Note:  you can also get my analysis of the October 2011 Bain Luxury Goods Worldwide Market Study.

Last week Bain released an update of its annual Luxury Goods Worldwide Market Study, created by the head of its luxury goods practice, Claudia D’Arpizio (thanks to Bain for providing me with a copy of the presentation materials).

While the buying habits of the affluent may have some interest in themselves, studies like Bain’s (which is the best I’ve seen) are particularly significant for investors. Publicly traded global luxury companies are an excellent way of participating in the superior growth of emerging countries without having to take the risk of owning consumer-oriented stocks in local markets.

The main conclusions from the April update:

1.  The 2010 holiday season was surprisingly strong.  To some extent, we already knew this from earnings reports, but–

–in addition to Greater China (the mainland, Hong Kong, Macau, Taiwan), the US was notably robust

–the high end did the best

–internet sales, although still small, are growing more quickly than the overall industry

–when the final reports are in (not for another month or two for some companies), 2010 will likely show global luxury sales surpassed the 2007 peak of €170 billion.

2.  2011 is following in the same vein. 

–retail continues to show double-digit same store sales growth, resulting both from higher traffic and from higher average purchase

–Chinese tourists are boosting business in Europe (over half of Chinese luxury spending is done abroad)

–wholesalers are restocking, after a couple of lean years.  Highly cyclical categories, like watches and menswear, are enjoying a rebound.  More stable areas, like leather goods and women’s shoes, are also showing strong growth.

3.  Greater China will pass Japan as the #2 luxury goods market this year, likely posting sales of €22 billion (up 25% year on year) vs. Japanese revenue of €17 billion or so (-5%).  The US will remain the #1 market at about €52 billion (+8%)–although, if we counted tourist purchases, China may already be #1.   According to Bain:

–the Chinese consumer is younger and more open to e-commerce than the typical Western luxury goods buyer

–the market is more skewed toward male consumers

–demand for luxury goods is spreading from the biggest cities on the east coast to second- and third-tier cities inland, following the development of the overall Chinese economy

–global luxury brands are increasingly shifting from distributing in China through wholesalers to opening company-owned stores there.  This move raises the capital intensity of their Chinese businesses.  But it also allows the firms to capture the lucrative wholesale to retail markup, as well as to better control their inventories and their brand message.  Perhaps most important, it signals the brands’ higher level of comfort in selling to consumers on the mainland.

4.  Japan will likely begin to recover from the March 11th earthquake in 3Q11.  Still, full-year luxury sales will probably fall by 5% from last year’s level.  Two Japanese luxury goods issues:

earthquake

–luxury goods stores were closed for ten days after the Fukushima earthquake/tsunamis on March 11th, due to lack of electric power.  Business was good after the stores reopened.  But (to me, anyway) it’s not clear how much, or for how long (six months?) luxury goods spending will be affected by feelings of jishiku –the idea that one should refrain from excessive consumption to show solidarity with those who suffered earthquake losses.

–business in Japan’s second city, Osaka, hasn’t been affected

secular

For many years, Japan was a premier market for Western luxury goods, driven by the strong preference of perhaps half the population (a much bigger proportion than elsewhere) for these products, and a willingness to pay much higher prices than prevailed in the rest of the world.   In my opinion, two developments of the late 1990s began to change this favorable picture:

–younger Japanese began shifting to local brands, partly as a rejection of their parents’ values, partly because Japanese brands were more affordable

–older Japanese began to retire (the working age population peaked in 1996).

I’m not quite sure why, but as Bain notes, these factors only impacted the Japanese luxury goods market in a significant way in 2007, when sales were flat, year on year.  In the two years since, revenues have dropped by about 15%.  Pre-earthquake, industry estimates for 2011 were for revenues to stabilize–but not increase.

Sales may get a temporary boost as Japanese GDP gains from spending to rebuild holes and factories destroyed by the earthquake/tsunamis, but my guess is that this is only a temporary reprieve.  Bain expects only 1%-2% annual growth in Japanese luxury goods purchases over the next several years from the depressed levels currently.

my thoughts

Ex Japan, the global luxury goods market looks to be in excellent health, driven by explosive growth in Asia ex Japan and expansion at a better-than-GDP rate in the US and EU.  Bain also highlights the increasing importance of developing markets like Brazil, Russia, India and the Middle East.  Today they amount to only about 7% of the world luxury goods market, but they are growing very quickly.  Companies able to manage their Japanese exposure effectively appear to me to be very well situated for superior growth.

—

TIF: 4Q10, Japan, fiscal 2011 earnings outlook

March 22, 2011 By in China, Current Market Thoughts, earnings conference calls, Hong Kong, Industry Analysis, Japanese development, Luxury goods, Retail, Stock ideas Tags: , , , , , , , Leave a comment

the results

TIF reported fiscal 4Q10 (ended Jan 31, 2011) earnings before the market opening in New York yesterday.  Profits came in at $1.44 per diluted share, ex non-recurring items.  This compared favorably with analysts’ estimates of $1.39.

Full year results were $2.93.  That was better than the range of $2.83-$2.88 the company had guided to when it announced 2010 holiday sales in January.  Actuals were also almost 20% ahead of the range of $2.45-$2.50, that TIF management’s initial guidance for fiscal 2010, issued a year ago.

company guidance for 2011

On the earnings call, the company gave its first indication of prospects for fiscal 2011, a year in which TIF again expects significant growth.  Prior to the earthquake in Japan, a country that accounted for 18% of sales in 2010, TIF was planning to guide to eps of $3.35-$3.45 on sales growth of 15%-19%.

For the current quarter, 1Q11, the company had expected eps of $.62 per share, on flat sales in Japan. It is estimating that the negative effects of the earthquake on its business will mean a year on year decline of overall Japanese sales of 15% for the quarter–and a reduction of total corporate eps by $.05.  Given that its stores in northern Japan were closed last week and only opened this past weekend, TIF has only very limited information to project from.  As a result, it is, for the moment at least, retaining its pre-earthquake assumption of same store sales for the remainder of the year as being flat with 2010.

Analysts have penciled in $.55 for the April quarter.  Estimates range from $3.10 to $3.43 (a stupidly over-precise number, in my view) for the full fiscal year.

Japan

For decades Japan was the El Dorado of luxury goods markets.   Intense consumption of luxury goods by half the population and the willingness of buyers to pay prices 20%-40% higher than makers could change in their home markets are the reasons why.  Sales suddenly stopped in their tracks as recession hit in 2008, however–and haven’t bounced back.   Everyone has theories; no one knows for sure why. But this appears to be a permanent change in the market.

As a result, the game in Japan has changed for Western luxury goods manufacturers from one of aggressive expansion to one of maximizing profits and extracting capital if possible.  In today’s Japanese market the negative effects of the earthquake may require a temporary change in emphasis but not a change in (a very defensive) strategy.

TIF’s business in Japan can be divided into general areas:  Kanto (the Tokyo area) and points north; and the Kansai region around Osaka, farther south.  The former, which accounts for maybe 60% of TIF’s Japanese business, has been affected by the earthquake; the latter has not.

How should we interpret TIF’s forecast of a 15% decline in Japanese sales for 1Q11?  Let’s assume that the falloff comes completely from the north.  TIF says that Japan had been comping positive during the quarter until the earthquake.  Say that’s half the quarter.  For sales to be down by 15% for the entire quarter, sales have got to be down 30% for the second half of the period.  If that comes solely from Kanto and Tohoku, their sales must be down by 30%/.6 = 50%.  This strikes me as an excessively gloomy estimate.

This drastic falloff clips $.05 per share from earnings, according to TIF.  We’ll see whether down 15% is an accurate estimate or not.  But no matter what, TIF understands its own internal profit dynamics much better than anyone on the outside. So the relationship:  down 15% in sales = down $.05/share, is probably a very reliable one.

If conditions in Japan remain depressed for the remainder of fiscal 2011, TIF’s earnings will be $.35 lower than the company envisioned before the earthquake struck.  It’s possible in a very faddish place like Japan that a sympathetic abstinence from luxury goods spending affects everyone in northern Japan–whether touched by the earthquake or not–and lasts for a year. (In the early 1990s, for example, it was chic to be poor.  So bars that offered cow intestines (tripe) to eat sprouted up, enjoyed a year of success and just as quickly disappeared).  Anywhere else, that would be much too pessimistic.  I’d be tempted to have the sales figures fade back to normal (meaning same store sales growth of zero) in a linear fashion through yearend instead.  If so, the hit to fiscal 2011 eps would be around $.20.

factoring Japan into the TIF price

Whether the right number is $.40 or $.20 or $.60, the more important question is how an investor should factor this into the TIF stock price.  It seems to me that if the earnings loss from Japan is truly a one-time event, the proper way to account for it is to subtract $.40, or $.20, or $.60 from the stock price.  Knocking $8 off the share quote, which is what the Wall Street reaction has been, is in effect assuming that TIF’s business in Japan is permanently impaired and the lower earnings level will be a fact of life from now on.

I think that’s just wrong.

the rest of TIF’s business is booming

Asia ex Japan and Europe, which together make up about 30% of TIF’s sales, will likely be up by 25% or so.

Sales to distributors for Russia and the Middle East will probably be higher than that.

The US, which in all likelihood will be less than half of the company’s total for the first time ever, will rise by 10% or so.

The only sign of weakness in the world ex Japan is in lower-priced (under $500) items in the US.  For “macroeconomic” reasons, sales of silver jewelry are barely increasing.  I think this means that affluent customers who had traded down to silver during the recession have traded back up to higher-priced items.  (In fact, sales of diamonds–and especially TIF’s newly-introduced line of yellow diamonds–are very strong, as are fine and fashion gold.)  Less affluent customers, in contrast, reined in their silver purchases during the downturn and have not yet resumed buying at their normal rate.

the stock

TIF management is guiding to earnings of around $3.40 for this year, ex the Japan earthquake effect.  That’s probably too conservative.  Let’s say that $3.75 is a more realistic guess.  The negative effect of the Japan earthquake may have taken away that upside. But if the loss of Japanese business is indeed temporary, 2012 earnings per share growth is likely to be enormous–organic growth + Japan bounceback.  EPS is likely to be in the $4.50 range.

If we apply a 20x multiple to the $3.40 number for 2011, we arrive at a target price of $68 for this year.  If we apply 25x, which is arguably more appropriate for a global firm growing as quickly and steadily as TIF, we get $85.  At the current price of around $60, the multiple the market is assigning is 17.5x.

If we were to look out a year, a 20x multiple on $4.50 would be $90.

What do these calculations mean?  I interpret them as saying that in the current price the market is assuming the worst probable outcome for sales in Japan this year (the reality might be worse, but I don’t think the chances of that happening are high).  The market seems to also be saying that TIF’s Japanese franchise is permanently impaired.

This says to me that TIF’s stock has limited downside.  And, it’s possible that TIF could be trading as much as 50% higher a year from now, assuming a reasonable overall stock market and that business in Japan bounces back to its pre-earthquake level by 2012.