Luxury jeweler Tiffany & Co. (TIF) is set to release fourth-quarter and full-year earnings results on Friday morning. The company, known for its little blue box, delivered disappointing earnings in the second and third quarters, leaving investors to wonder whether the fourth-quarter results will look more like a diamond or a lump of coal.
Analysts expect Tiffany to post earnings of $1.61 per Biedex.com on revenue of $1.34 billion. That estimate would mark a decline in earnings of 3.5% over the fourth quarter of last year. Earnings from the third quarter were 4% lower than the previous year, so lower earnings have to be a concern for investors. Over the last three years, the company has seen earnings grow by an average of 8% per year.
Sales were up 4% in the third quarter and they are expected to increase by a paltry 0.1% in the fourth quarter. Over the last three years, sales have only increased by an average of 3%.
Despite the decline in earnings and the slow growth in sales, Tiffany still has decent management efficiency and profitability measurements. The return on equity is 16.5% and the return on assets is at 9.8%. The profit margin is at 18.2% and the operating margin is 18.4%.
All in all, the fundamentals aren’t terrible for Tiffany, but the slow growth in earnings is a concern. The global economy has been growing at a decent pace over the last three years and most luxury brands have been doing relatively well. If a company hasn’t been able to grow earnings and sales in a positive environment, what is going to happen to them if the global economy slows? And that is exactly what most economists expect in the coming years – a global economic slowdown.
The Stock Fell Drastically in the Second Half of 2018
The fourth quarter of 2018 was a rough one for most stocks, but Tiffany & Co. started falling sooner than the overall market and it fell more sharply. From a high of $139.26 in July, the stock fell all the way down to $72.63 in December – a drop of 48%.
Tiffany has rallied back rather sharply from the December low and has tacked on 32% in the last few months. However, looking at the weekly chart we see that the stock has yet to move back above the 104-week or 52-week moving averages.
The rally has moved the weekly stochastic readings out of oversold territory and into overbought territory and that is a bit of a concern. The 10-week RSI was also in oversold territory back in December, but it has barely moved back above the 50 level at this point in time.
Looking back to 2016 and up through the high last summer, the stock was able to remain in overbought territory for long periods of time in the second half of 2016 and again in the middle of 2018.
Looking back even further, Tiffany’s stock went through a similar bullish phase in 2013 and 2014 where the stock price doubled, but then it fell sharply in 2015. After the initial fall, the stock rallied back up to its 52-week moving average and then turned lower again and trended lower until mid-2016. That is when the second major rally took the stock from the $60 area all the way up to the $139 high last summer.
I would consider the technical picture a little concerning at this time due to the fact that the stock hasn’t moved back above the long-term moving averages. Seeing a similar pattern in 2015-2016 adds to the concern.
The Sentiment Toward Tiffany is Relatively Bearish and that Could Help the Stock
Turning our attention to the sentiment indicators for Tiffany, we see that analysts and investors are leaning toward the bearish side ever so slightly. According to the Wall Street Journal, there are 29 analysts following the stock at this time and 16 of them have it rated as a “buy” while 13 have it rated as a “hold.” In terms of percentages, this means only 55% of analysts have the stock rated as a buy when we typically see that percentage in the 65-75% range for most well-known stocks.
The short interest ratio for Tiffany is currently at 4.61. This indicator is also slightly skewed to the bearish side. I consider anything above 5.0 as bearish and the average is in the 3.0 range for most stocks. The number of shares sold short-jumped from 7.4 million to 8.4 million from the mid-February reading through the reading at the end of the month. This increase in short interest indicates that the pessimism is rising toward the stock.
The put/call ratio for Tiffany is extremely skewed toward the bearish side. The current reading is at 2.52 with 80,182 puts open and only 31,809 calls open at this time. I have expressed before that the average put call ratio is in the 0.75 range and readings above 1.0 usually indicate pessimism toward a stock. Seeing Tiffany’s put/call ratio at 2.52 – that is one of the highest put/call ratios that I have seen lately.
My Overall Take on Tiffany
Looking at the three different analysis styles for Tiffany, we see areas of concern from both the fundamental and technical analysis while the sentiment is rather bearish. From the fundamentals, we see that earnings declined in the third quarter and are expected to decline again in the fourth quarter. Sales growth has been slow in the last few years and isn’t expected to grow by much in the fourth quarter.
As far as the technical analysis, the fact that the stock has rallied 32% from the December low and yet it is still below its 52-week moving average and its 104-week is concerning. The weekly stochastic readings being in overbought territory is also a minor concern. The bigger concern to me is the similarity to the way the stock performed back in 2015.
The sentiment gives me some sense of hope for the stock after the earnings report. Seeing analysts, short sellers, and option traders all showing signs of pessimism means that the expectations for earnings are pretty low. In my experience, the sentiment indicators are extremely important when it comes to earnings reports. Some of the bearish sentiment is warranted due to the weakening fundamentals and the poor price performance in the second half of 2018.
Because of the negative sentiment, I can see Tiffany possibly climbing after earnings. If the company can post EPS results that are in line with expectations I think that would be enough to send the stock up a little. However, I expect the rally to be short-lived and then the resistance of the 52-week moving average will likely come into play.
You might be able to get a 10% move to the upside after earnings, but I wouldn’t expect much more than that.
If you would like to learn more about protecting and growing your portfolio in all market environments, please consider joining The Hedged Alpha Strategy.
One new intermediate to long-term stock or ETF recommendation per week
One or two option recommendations per month
Bullish and bearish recommendations to help you weather different market conditions
A weekly update with my views on the market, events to keep an eye on, and updates on active recommendations
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.