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Is Signet Jewelers Set to Sparkle in Your Portfolio?

Tuesday, November 7th, 2017

I am aware jewelry is a great gift for the woman in your life, however have you ever considered giving them shares of stock in the jewelry store instead? Only 43 shopping days remain, and a stock certificate could be a far better investment but to be honest you may lose that special woman in your life. But if you are bold enough to make that wise financial decision, let’s examine a well-known jewelry company to see if it would be a good investment. One of the largest jewelry stores is Signet Jewelers Limited, symbol SIG, you may not recognize the name, but you will recognize the names of their stores, Kay jewelers, Jared The Gallery, and Zales. With a market capitalization of four billion dollars this is not one of your smaller jewelry stores. When I began my search for a jewelry company I wanted to look at Blue Nile, which is an online jewelry store. Unfortunately, they were taken private for roughly a 34% premium at $40.75 last November. They were acquired by the investment group, Bain Capital Private Equity and Bow Street LLC for roughly $500 million. So, since they are now private I decided to look at Signet Jewelers.

Signet currently trades around $68 per share has a 52-week low of $46.09 and a 52-week high of $101.46. That is a 33% decline from the 52-week high but if you go back to October 2015 this stock did trade in excess of $150 which is a 55% decline. It appears the stock was overvalued for the past year but now it has become more attractive. The current P/E ratio is only 11 versus 18.8 for the industry. Price to sales also looks attractive at 0.65 versus the industry at 0.71. Also important is what investors are paying for the tangible book value of the company and Signet is very attractive at 2.2 about 1/10 of the industry average at 20.2. Lastly, price to cash flow is another good value at 6.2 compared with the industry at 9.7. I’m also pleased to see that investors receive a 1.8% dividend and the company only uses 17% of their earnings to pay out that dividend.

The growth rates are what appear to be holding the stock down, sales year-over-year for the last 12 months declined by 4.6% when the industry experienced an increase of 5.6%. Also, in line with the sales are the earnings which fell 5.9% when the industry experienced a 69% increase in their earnings-per-share.

The financial strength of Signet appears to be almost as strong as the diamonds they sell. With a current ratio of 2.4, well above the industry at 1.6, I find liquidity of this company to be more than sufficient. Looking at total debt to equity of 59, well below the industry at 95, is very comforting. One thing I noticed which I disliked was short-term debt is higher than long-term debt. Looking forward, I would want to understand what this company’s plan is to lock in lower interest rates on that debt.

The company has a nice net profit margin of 7.8%, which is more than double the industry average at 3.8%. This does translate into an attractive return on equity of 18.1% which is slightly below the industry at 20.2%. When I see a company with a return on equity of 15% I do get a good feeling.

When I reviewed the efficiency of the company I was disappointed, receivable and inventory turnover is well below the industry average of jewelry and watch retailers. Receivable turnover for the last 12 months was 5.4 for Signet compared to the industry at 33.3. Inventory turnover for the last 12 months also was a concern at 1.7, roughly half the industry at 3.3. If I was to buy this company or if I held the stock, I would want to understand more about the receivable turnover and inventory turnover to make sure the company is not going to be experiencing increasing bad debts or get stuck with inventory that must be discounted.

Looking forward to the year ending January 2019, there are seven analysts who are looking for earnings-per-share of $7.49 on a GAAP (generally accepted accounting principles) basis. This would yield a forward PE of nine based on the current stock price. The $7.49 also appears to be a very strong estimate because the range of the seven analysts is a high of $7.79 and a low of $7.30. Using our forward Price-Earnings Ratio of 16.5 that would yield a target sell price of $124. A very strong case for investing in the stock as opposed to buying the jewelry. But guys or gals if you do elect to get the stock and not the jewelry and that special person is not happy, please do not blame me. Even though I think it will be a smarter investment.

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