Enterprise Value = $471.43 million
Operating Income = $55.59 million
EV/Operating Income = 8.48x
Earnings Yield = 13%
Price/Revenue = .62x
Debt/Equity = 28%
Movado is a luxury watchmaker. In addition to selling watches via a large number of brands to various retailers, they also operate 44 retail stores. They can chart their origins as far back to 1881 when the firm was called LAI Ditescheim & Freres SA in Switzerland. The company changed its name to Movado in 1905.
Movado’s signature watch is the mid-century “Museum Watch,” which is noteworthy for its minimalist design. It is a simple black watch with one dot representing the 12, a design which is often duplicated into other watch designs.
They sell at a wide variety of price points and multiple brands. They sell everything from luxury watches that sell for over $10,000, to affordable luxury watches (selling under brands such as Hugo Boss) at a $75-$500 levels, and mass market watches that sell for less than $75.
Watch making is a hated industry. As cell phones grew in popularity, watch use declined. Watches are declining in popularity as they are no longer a go-to means to assess time. It’s much easier to look at a phone to tell time. Mechanical watches are also being crowded out by Fitbits and Apple Watches.
Even with the industry in decline, the industry isn’t going away. In particular, I don’t think that luxury watches are going away any time soon. People don’t wear luxury watches like Movado to tell time. They wear them for reasons of fashion and that market isn’t going to disappear.
Movado is priced like it is going out of business, but I don’t think that will ever happen. At some point, the market will stabilize. A good parallel to this is the predictions that e-readers would eliminate print books, a trend which never really materialized.
The fact that the watch industry is not going away is reflected in the Movado’s operating performance. 2019’s sales were actually the best on record at $680 million. Cash flows remain healthy and the balance sheet is robust. This looks to me like a situation where Mr. Market’s sentiment doesn’t reflect the true underlying reality of the business.
Movado has a high degree of financial quality. The debt/equity ratio is only 24%. There is a significant amount of cash on hand, at $5 per share and 13.42% of assets. The Altman Z-Score of 3.1 implies a low probability of bankruptcy risk.
Movado trades at a discount to its competitors and its history. The current P/E of 7.87 compares to an industry average of 20.03. It currently trades at 6x cash flow. The price/sales ratio of .62 compares to an industry average of .93. As recently as mid-2018, the stock traded at 2x sales. The stock is so cheap that the current price/sales level is near the lows reached at the nadir of the financial crisis in 2009. Price/book is also at a significantly cheap level, currently at .85x.
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