Could Be a Tarnished Gem

 | Dec 01, 2011 | 1:00 PM EST  | Comments
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If you could sum up the last few months into one word, I believe that word would be "turmoil." The stock market goes up 500 points in one day and the next it goes down 300. Oil prices fall, then rise, and then fall again. One day there's a deal to bail out Europe, then nothing. One particular stock that has been rising and falling all summer is jewelry seller Tiffany (TIF).

Strong global demand has been driving Tiffany but, because of worries over European demand, the stock has bounced around like a basketball. On Monday cautious fiscal fourth-quarter guidance caused the stock to melt down. Can this tarnished gem sparkle again?

For the third quarter, Tiffany posted better-than-expected results. Profit rose 63% , and the company increased full-year guidance. But it wasn't enough. Investors punished the stock when management forecasted slightly lower gross margins because of increased commodity costs.

Third-quarter revenue rose 21% to $821.8 million from $681.7 million a year earlier. Sales in the Americas grew 17% to $387.7 million, and same-store sales (numbers for stores open at least one year) rose an astounding 16%. Sales rose 44% in Asia-Pacific, driven by strong results in China, and they were up 19% in Japan. Sales also climbed 19% in Europe. So much for a global financial crisis. 

On the conference call, management had told investors to expect earnings per share in the range of $1.48 to $1.58, below the Street's consensus forecast of $1.64. 

While many investors are still very bullish on Tiffany, I believe it's coming up against strong comparisons, and it will be difficult for the company to exceed expectations going forward. Coming out of the financial crisis of 2009, revenue rebounded dramatically. For example, in fiscal 2011 revenue jumped 13.8%, and it rose 19.2% in 2012. But, by fiscal 2013, sales should return to a more normal pattern and increase only 9%. While that's a good growth rate, it's not the double digits to which investors have grown accustomed.

What drives stock prices higher is the change of the change (also known as the second derivative). When revenue jumped 13%, then 19%, the stock was driven higher because the second derivate was positive. But now, with a 9% forecast, the second derivate will be negative. In my experience, negative second-derivative stocks either decline or churn around and mark time. What's important is the outlook: Is it accelerating or decelerating? Assuming global growth doesn't pick up dramatically in the next six months, it's more likely than not that Tiffany has peaked. To me, this stock has largely made its move.

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