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The Right Time for Movado?
11/09/2015 8:00 am EST
Most investors can’t stomach such gut-wrenching drops, but opportunities can be found when high-flying luxury brands stumble, suggests Linda McDonough in Personal Finance.
In our view, alarm bells are ringing to buy Movado (MOV), the designer of sophisticated, luxury watches.
Before the recent news of its well-received price hikes, Movado was down 25% year-to-date. It’s a less risky buy now that a turnaround is evident.
The buy signals came in the form of higher-than-average trading volume that accompanied an increase in stock price. On August 27 Movado traded nine times its average volume with a 21% price increase.
Movado has been digging itself out of a hole created by its low-end ESQ brand. In late 2012 the company re-launched the brand, but retailers couldn’t move the merchandise.
The news that customers were accepting price increases on some of Movado’s watches sent the stock racing. As these higher prices don’t accompany higher costs, Movado’s profitability should improve.
Movado is now introducing several new watch collections that have good customer reviews. Movado’s Museum Dial watch, which was added to the Museum of Modern Art’s permanent collection in 1960, established the company’s stellar reputation for cutting-edge design.
A recent collaboration with designer Yves Behar, named Movado Edge, is expected to expand the Museum watch’s popularity.
Although a weak euro depressed sales in the first half of the year, growth adjusted for currency fluctuations increased the past two quarters.
Besides better pricing and robust demand for new collections, Movado also spent the past year whittling down costs so that any improvement in revenue should be magnified in earnings.
Movado trades for a P/E equal to its 12% expected earnings growth next year. Its peer group has P/Es equal to 1.5 times growth rates.
As investors grow more confident in Movado’s earnings growth, the P/E multiple should expand and analyst estimates should rise with it.
Movado sits on nearly $6 per share in net cash and pays a $0.44 annual dividend. The company has generated abundant free cash flow every year since the turn of the century and has been buying back shares recently. So the timing for buyers couldn’t be better.
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