In-Depth Analysis: Tobias Carlisle On Movado Group, Inc (MOV) by Greenbackd
It’s no secret why Movado Group is in the bargain bin. Investors fear that the beast of 1 Infinite Loop, Cupertino-Apple-has done for watches what it did for Walkmans (the iPod), desktop PCs (the iMac), music (iTunes), laptops (the Macbook), and cell phones (the iPhone), not to mention tablets (the iPad), and whatever the AppleTV replaced (the VCR?). With a string of category- and competitor-killing hits like that, it’s no wonder that the stocks of watchmakers are in the dumps. But when branded consumer goods producers get beaten up I like to take a very close look. Nothing compounds like assetlight consumer brands. And if you can get them at a deep undervaluation, the risk:reward proposition becomes truly asymmetric, as I believe it is for Movado now. Let’s take a look at the company.
Movado designs and markets watches wholesale, and retail through the company’s outlet stores. Its portfolio of brands includes Coach Watches, Concord, Ebel, ESQ Movado, Scuderia Ferrari Watches, HUGO BOSS Watches, Juicy Couture Watches, Lacoste Watches, Movado and Tommy Hilfiger Watches. Based in Paramus, New Jersey, it has operations in the United States, Europe, the Americas, Asia and the Middle East.
Movado has a market capitalization of $593 million at its $24.61 share price at the time of writing. It has $159 million in net cash on its balance sheet, and generated operating earnings over the last twelve months of $70 million. That puts it on an acquirer’s multiple of 6.2x. The acquirer’s multiple is a variation of the more familiar enterprise multiple, the valuation ratio used by activists and private equity firms to find attractive takeover candidates.
It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization.
It is calculated as follows:
Enterprise Value / Operating Earnings
where enterprise value is the market capitalization plus total debt, minority interests, and any preferred stock less cash and equivalents; and where operating earnings is a measure comparable to earnings before interest and taxes (EBIT), but constructed from the top of the income statement down (EBIT is constructed from the bottom up). Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items-earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations.
It is based on the investment strategy described in my book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (Wiley Finance, 2014). The Acquirer’s Multiple website has a free list of the cheapest stocks in the largest 1000 US exchange-traded stocks and ADRs. (Movado is on the paid All Investable Screener.)
Movado stands up on other value metrics too. It trades on a PE of 13.2x, and has generated a free cash flow / enterprise value yield of 9 percent over the last twelve months. It pays a small dividend, yielding 1.7 percent at prevailing prices.
So we know Movado is unusually cheap, and we know why, but, as Laurence Olivier’s evil Szell asks over and over again of Dustin Hoffman’s character, Babe, in 1976’s Marathon Man, “Is it safe?” There are a number of statistical tools we can apply to drill Movado’s teeth, and we’ll get to those shortly, but its squeaky clean, cash-rich balance makes for an attractive starting point. Its Altman Z-Score—a measure of the likelihood that a company will end up in bankruptcy within 2 years—of 5.86 indicates that it is far from financially distressed (greater than 2.6 is considered safe). Movado’s Piotroski F-Score is 5 out of a possible 9, which is about average for a stable company. (It misses on 4 dimensions but remains strong on each: Its return on assets slipped year-on-year, but it still generated 8.35 percent on assets; its gross margins fell, but remain very healthy at 52 percent; its current ratio slipped, but remains very high at 5.4x; and its asset turnover slipped, but still sits at about 1x, down from 1.1x last year). Movado’s Beneish M-Score of -2.67 also indicates that it’s not an earnings manipulator (anything greater than -2.22 is good news). From a statistical perspective, it’s not close to financial distress (in fact it’s financially strong), and there’s no indication of earnings manipulation. Oh, it’s very safe.
Short interest spiked in May to 10.84 percent of the float, but has fallen each month since to its most recent 9.61 percent on July 15. It’s close to its historical peak, and short money tends to be smart money—it’s certainly been the right bet since Movado’s ~$47 stock price peak in November 2013—but the fact that short interest is now declining may indicate that the shorts have got what they want, and are ready to move on.
An issue for Movado is that management don’t own much stock. Collectively they hold around 3 percent of the company, most of which has come from option grants. The largest holder is Vice Chairman Cote with 1.77 percent, and he is a net seller. CEO Grinberg’s stock has a market value of $2.48 million. While that is nice sum, in context with his $2.5 million in compensation this year, it isn’t material. I believe that when managers have a significant holding in their own stock (material relative to their own net worth and income) they tend to be focused on the price of stock relative to its intrinsic value. A Henry Singletontype manager—one that thinks like an owner—would use some of Movado’s huge cash hoard to buy back the stock while it’s cheap. Doing so increases the intrinsic value of each share remaining outstanding, and allows shareholder who want to sell to get out of a relatively illiquid stock.
Shareholders who believe in the company get a tax efficient boost to the value of the shares they hold. To management’s credit, and despite their small holdings, Movado has a substantial $100 million buyback authorization in place. (The board increased an existing share repurchase authorization to $100 million on November 25, 2014.) In the first quarter that resulted in net repurchases of around $22 million at an average price of $25.87—a small premium to the current market price. At this pace, Movado will buy back the full $100 million before the end of the year—a material sum relative to its ~$600 million market cap, equating to about 15 percent of the outstanding stock at current prices—and be left with more than $100 million in cash and equivalents, excluding whatever they earn between now and December 31. With any luck, they’ll complete the buy back and re-authorize another the same size.
Movado possesses many of the qualities I like in a stock. At $24.61, it trades on an acquirer’s multiple of 6.2x, which is very cheap. With $160 million in net cash on the balance sheet, it’s cash rich, and liquid, and it passes all of the safety screens with flying colors. While management don’t hold a lot of stock, the company is undertaking a material buyback that will significantly boost per share intrinsic value. That’s usually enough for me to take a position. I know many investors need to dig into the business, which is something I’ve conspicuously not done here. How the watch business will fare against the category-killing beast from 1 Infinite Loop is anyone’s guess. My sense is that watches are different from other tech gadgets because they serve as jewelry too. I own almost all of the other Apple gadgets I listed at the start of the article, but the watch doesn’t appeal to me at all, while high-end watches do. (I’ve talked about it previously, but not in detail: Ten years ago I bought a swiss watch from the auction of the deceased and bankrupt estate of flamboyant Australian corporate raider, stock market operator, and insider trader Rene Rivkin. I paid less than the value of the gold content in the watch. When I had it appraised 5 years later I discovered that, despite the gold price trebling in the interim, I had somehow managed to overpay. What’s worse is that it’s a really garish watch I’ve worn five times, wearing a dinner suit each time because nothing else seems appropriate. Shows how little I know about watches). I digress. I won’t pay up for compounders, but I’ll buy them cheap. And Movado is a very cheap stock, with the potential to continue its historical compounding. Most importantly, management is proactively embracing the opportunity to exploit the discount in the stock by buying it, if not for their own accounts, at least for the company’s. I am doing the same. Long Movado.
Tobias Carlisle is a founder of the website acquirersmultiple.com. He is best known as the author of the website Greenbackd, the books Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Prior to founding the forerunner to Carbon Beach in 2010, Tobias was an analyst at an activist hedge fund, general counsel of a company listed on the Australian Stock Exchange, and a corporate advisory lawyer. As a lawyer specializing in mergers and acquisitions he has advised on transactions across a variety of industries in the United States, the United Kingdom, China, Australia, Singapore, Bermuda, Papua New Guinea, New Zealand, and Guam. He is a graduate of the University of Queensland in Australia with degrees in Law (2001) and Business (Management) (1999).
Toby is a ValueConferences instructor and spoke at Deep Value Summit 2013.
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