MOV US - Movado Group, Inc, ‘watch’ this deep value dream in a well-run company

No, you don't have to use translate.google.com to understand what I mean with the title.

I'm talking about one company whose cheapness could be explained by the fact that it happens to be in two of the most hated categories, retail and watches, but that seems to show either deep value and quality characteristics, the perfect combination for what is commonly known as a Joel Greenblatt’s ‘magic formula stock'.

Why deep value

This STOCK has a net current asset value around 360 mln. $ (and around 50% of current assets is in cash!): with a market cap of 523 mln.$ it is trading @ a price/ncav (net current asset value per share) of 1.5.

Usually these kind of valuations are typical of companies in serious trouble or companies whose prospects are often considered ‘binary’ lottery-ticket type events, like small biotech stocks, with either a small chance of big upside, or a much greater probability of nothing at all.

In fact, if we do a search for those companies that offer similar valuations (stocks with a p/ncav < 1.5 and more than 40 % of cash/current assets) we find that there are globally 590 stocks with those characteristics (nearly 30% of them are Japanese companies), they are typically micro-caps and, yes, biotech stocks are well represented, but there are other industries:

For example the Industrial Machinery sub-industry is the most represented: is mostly made up of profitable Japanese companies, with a median market cap around 100 mln.$ and trading near net current asset value. It could be a nice idea to invest in a basket of those kind of companies.

But what if we if we try to fish among those that are cheap and profitable?

Movado seems to be one of those.

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Movado is a watch maker focused on the middle market

- range of products cover from the low end to the high end, with own brands and licenses;

- present in 3 categories:

-- ‘moderate and fashion’ (75-500$), through license agreements

-- ‘accessible luxury’ (500-2,500$), with its own Movado brand

-- ‘luxury’ (1,300-10,000$), with its own Concord and Ebel brands

not in the:

-- ‘mass market’ (<75$: Casio, Seiko etc.)

-- ‘exclusive’ (>10,000$: A.Piguet, P.Philippe, Piaget, Vacheron Constantin)

- flexible manufacturing model that relies on independent manufacturers (not a producer)

- licensed brands: 48% 2016 (FY2017), avg. last 5y: 45-50% (no individual licensed brand with sales > 20% of the company’s total consolidated net sales)

- smartwatch technology in partnership with Google (Android Wear)

- family controlled (70% Grinberg) via non exchangeable share class (10 times voting shares)

Competitors in its categories

- ‘moderate and fashion’: Swatch, Bulova, Citizen, Fossil, Guess, Seiko, M.Kors

- ‘accessible luxury’: Gucci, Rado, Michele and R.Weil;

- ‘luxury’: Baume & Mercier, Breitling, Cartier, Omega, Rolex and TAG Heuer

Operating segments: ‘wholesale’ and ‘retail’ (88-90% and 10-12% respectively)

- ‘wholesale’: main activity, sells through jewelry store chain or via department stores

-- clients’ concentration: Signet Jewelers near 13% in fiscal ‘17, (Signet Jewelers + Macy’s near 23% in fiscal ‘16)

-- International/USA, 52-48%

- ‘retail’: operates 40 retail outlet locations in outlet centers across the United States, sell discontinued models

Risks:

- smartwatch:

-- new competitors (tech companies)

-- different practices, e.g. warranties: … particularly in the company’s luxury category, consumers may expect smartwatches to function and be compatible with the smartphone operating systems, particularly operating system updates ... but the company has no control over those updates

- reliance on department stores

- licenses (agreement and expiry):

-- Hugo Boss, dated March 2012, expires December 31, 2018;

-- T. Hilfiger, dated September 2009, expires December 31, 2019 (extendible five years)

-- Coach, dated January 2015, expires June 30, 2020

-- Lacoste, dated March 2014, expires December 31, 2022;

-- Ferrari, dated March 2012, expires December 31, 2017;

-- R. Minkoff, dated October 2016 (expected to launch in 2017), expires October, 2026

- Swatch is (my guess!) simultaneously a competitor and a supplier

- a substantial amount of the company’s product costs are incurred in Swiss francs

- financial covenants, compliance with each of the following

-- (a) consolidated EBITDA: (less than) $50,000,000

-- (b) consolidated leverage ratio (debt to ebitda): (more than) 2.5

Numbers:

- Gross margins: 53% 2016 (FY2017), avg. last 5y: 53-55% (not comparable to those of other companies, since some companies include all the costs related to their distribution networks in cost of sales whereas the company include those costs in SG&A);

- SG&A expenses (marketing, selling, distribution, gen. and a.): 44% 2016 (FY2017), avg.: 41-45%;

- Operating margins: 10% 2016 (FY2017), avg.: 10-12%

- 1,100 employees in its global operations, 202 in Switzerland and 17 in France (1,100, 210, 13 respectively in 2016);

- total debt is 30 mln.$;

- min. annual rentals under non-cancelable operating leases: 47 mln.$

- ‘cash and cash equivalents’, ‘CCE’, huge amount of cash, mostly held in foreign subsidiaries:

So, why I told you this is a quality and profitable company?

Because it has:

And so?

@ mid June '17 prices, MOV has:

- an enterprise value of 320 mln.$. (market cap plus negative net debt)

- T12 operating earnings (ebit corrected for extr. items) @ 51 mln.$, which could be a realistic number for the near future (if the company maintains its promise of the low range of sales, 516 mln.$, applying its low end of operating margins of 10% we'll have around 50 mln.$ of operating income)

--> that puts it on an acquirer's multiple of 6 (see ‘Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations’, by T. E. Carlisle) or fcfy on enterprise value of 16%: I think it may be worth taking position at this prices (22.7$ and 521 mln.$ market cap)