Are Diamonds Still a Girl’s Best Friend?

02/02/2009 10:45 am EST

Focus: STOCKS

John Christy

Founding Editor, Forbes International Investment Report

John H. Christy, editor of Forbes International Investment Report, says a jewelry store for the rich and famous is actually a bargain right now

Shares of companies in the luxury goods sector have been slammed by the global credit crunch and the ensuing market meltdown. The lucky few who can still afford to splurge on a new Ferrari or a chunky diamond necklace now find themselves marginally less inclined to do so as their portfolio values slowly evaporate with each monthly brokerage statement that arrives in the mail.

This environment has been absolutely brutal for companies like Toronto-based Harry Winston Diamond Ltd. (NYSE: HWD). The shares have plummeted from the $30s this past summer to around four bucks today.

Among purveyors of fine jewelry, Harry Winston is the cream of the crop. In fact, it almost makes Tiffany & Co. (NYSE: TIF) look low-rent by comparison. Winston has handled some of the world’s most famous diamonds, including the fabled Hope Diamond, which it donated to the Smithsonian Institution in 1958.

Harry Winston has long been a favorite of Hollywood celebrities, the British royal family, and countless tycoons. When Aristotle Onassis bought a 40-carat diamond engagement ring for Jacqueline Kennedy, he bought it at Harry Winston.

But Harry Winston isn’t merely a fancy jewelry shop. The company also owns a 40% stake in one of the world’s largest diamond mines, the remote Diavik mine in Canada’s Northwest Territories. The other 60% of the mine is owned by Rio Tinto (NYSE: RTP), which handles day-to-day operations.

Mining, of course, is an enterprise that requires massive capital expenditures. While Harry Winston’s debt load is relatively small—just $284 million in debt against $66 million in cash & equivalents—even a penny of debt is enough to spook investors in the current environment.

Add it all up—a nasty credit crunch, vanishing bonuses on Wall Street, and struggling emerging market economies, and selling expensive diamonds will be a pretty tough way to make a buck in 2009.

There’s no question that the short term and even the medium term look bleak for Harry Winston. But looking beyond the current panic and pessimism, diamonds are still a pretty alluring business. According to International Diamonds Consultants Ltd., demand will far outstrip supply in the coming decade, thanks in large part to massive wealth creation in the Middle East, China, and India.

But valuation may be the most compelling argument. At a recent $3.90, HWD sells for just two times consensus earnings forecasts for fiscal 2010 and 0.41x sales. Price to book value is 0.31x, meaning you’re buying $1 worth of the world’s most valuable diamond assets for just 31 cents.

Harry Winston has been around more than 100 years and it has seen its share of booms and busts before. It’s a fair bet that they will probably survive this one, too.

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