Triple-Net Active Portfolio member Movado Group (MOV) had quite a week last week and offered a cautionary tale about this market environment.
Last Thursday, the watch maker announced strong fourth-quarter earnings, the kind that should have given shares a boost. Movado beat quarterly estimates on both the top line (revenue of $194.3 million versus the $184.4 million consensus) and bottom line (earnings per share of $1.03 versus an 86-cent consensus) and announced a $1.00 special cash dividend in addition to its regular 35-cent quarterly dividend.
Movado's stock was rewarded with a 14.5% haircut on Thursday and another 1.5% drop on Friday, bringing the post-earnings announcement punishment to just under 16%. As you might imagine, there was more to this story.
After a record fiscal year (ended Jan. 31, 2023) in terms of revenue and operating income, Movado management rained on the company's fiscal 2024 parade. Full-year guidance for revenue ($725 million to $750 million) and earnings per share ($2.70 to $2.90) fell well below consensus estimates of $814 million and $4.61 a share, respectively.
If we use the midpoint of Movado's earnings guidance of $2.80 a share, that would put the forward price-to-earnings (P/E) ratio at 10 now and at a respectable 12 using the pre-earnings stock price. However, markets strongly disliked the picture presented by company guidance and adjusted the stock price accordingly.
Movado ended the quarter with net cash of $251.6 million, or $11.36 a share, and no debt, and now trades at just 2.12x net current asset value (NCAV) and 1.23x tangible book value. It currently yields 5% based on its regular quarterly dividend and 8.6% including the $1.00 special cash dividend.
The point is this: Movado is a cheap name with a great balance sheet, yet its shares still were hammered because of what may be seen as a rougher-than-expected fiscal 2024. If a company of this relative quality is slammed, what does that mean for lower-quality, more distressed names that don't have the balance sheet quality or level of profitability (even after lowered guidance) that Movado boasts?
The current market environment simply may not be right for "dumpster diving" for lower-quality stocks, those that suffer significant drops on earnings or other news, and those that may appear cheap. The markets are not forgiving these days and are a bit suspect of the year ahead. It appears that we may be moving toward the "throw the baby out with the bathwater" type of market, where little in the way of disappointment is tolerated.
