Several years ago, a well-known portfolio manager told me how he dealt with investment mistakes; he posted the stock certificates of his bad ideas on the wall outside his office. These acted as a reminder to him each time he entered his office. I suppose they were visible to everyone else in the office as well. As nice as it is to trumpet your successes, it is equally -- if not more -- important to acknowledge what is not working. In this particular case, while I am not ready to throw in the towel on this idea just yet, it has nonetheless been a disappointment thus far.
Watch maker Movado (MOV), the worst-performing member of my Double Net Dividend Portfolio, has had a rough go of it recently and shares are down more than 20% since my December column on the name. In fact, it's even worse than that; after eclipsing $30 in March, shares have given back one-third of their value, with the majority of the damage inflicted within the past month. The problem for Movado has not been earnings results; in fact, the company beat first-quarter estimates. The issue has been lowered company guidance. Revenue guidance for 2017 was reduced from $585 million-$600 million to $565 million-$580 million, while earnings per share guidance was reduced from $1.85-$2 to $1.55-$1.70.
My value leanings tell me a forward price earnings ratio of 13 (based on the low end of company earnings guidance) is not expensive. Furthermore, the company ended the quarter with $204 million or $8.88 per share in cash and just $35 million in debt. Furthermore, shares currently trade at just 1.3x net current asset value and 1.02x tangible book value per share, so what's not to like?
The potential problem for Movado is that it operates within an industry that is becoming antiquated. The "smartwatch" is becoming more popular, and the company will have to compete in this space. Lest you think Movado is standing still as consumer preferences change, last November the company introduced two smartwatch collections. They are certainly not inexpensive, but Movado products never have been. The company, however, appears hesitant to go all in on the smartwatch phenomenon, citing its own research that suggests "that about half of consumers in the U.S. are not interested in smartwatches." The question is whether the "all things to all (luxury) consumers" will work.
With a load of cash and little debt, Movado appears to have time on its side. Furthermore, this is a company, with a very small $300 million enterprise value, that may at some point be attractive to an acquirer. It has several positive attributes to a suitor: considerable cash, little debt and a fairly well-known brand name. It also has one major stumbling block: It is a dual-share class, family-controlled company, with the Grinberg family having voting control. Ultimately, they'll decide.
