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Is Signet Jewelers a Hidden Gem?

Signet Jewelers (NYSE:SIG) is a mainstream jewelry retailer- it operates Kay Jewelers and Jared The Galleria of Jewelry- and would seem to be threatened by economic conditions in the U.S. So far this year the stock is down 2% after being up about 1% in 2011. While the share price has been stagnant, the company’s performance has been reasonable, beating earnings estimates each of the last four quarters. Wall Street analysts, possibly sensing a pattern, now expect substantial earnings growth and Signet’s forward price-to-earnings ratio is less than 10. Even the trailing earnings generate a P/E of 12, quite low for a retailer of premium consumer goods. SIG is squarely in value stock territory. 

Signet Jewelers Ltd. (NYSE:SIG)

Some hedge funds have taken large positions in the stock, and with its flat performance over the past 18 months investors may have a chance to join them at a similar price. Select Equity Group, under the direction of Robert Caruso, owned over 4 million shares at the end of March according to the 13F it filed with the SEC. Select Equity Group had owned a large position in the stock for some time, though its holdings are down from the 5 million it had at the end of 2010 (read more about Select Equity Group). John Armitage’s Egerton Capital reported ownership of 3.5 million shares, a continued increase in a position that they had begun in summer 2011 (see more stock picks from John Armitage). The company’s management also believes the stock is undervalued, having recently announced that the company will expand its share buyback plan from $300 million to $350 million. Share buyback plans occur when company management believes that the company’s own equity offers a higher return than other uses of cash such as expanding the business, and is considered a bullish sign for stocks.

According to Signet’s most recent 10-Q for their first quarter ending in April, the company’s revenue grew only 1% compared to the same quarter in the previous year (with little change in number of stores, same-store sales were also up 1%). However, SGA expenses were flat and so net income rose from $75 million to $83 million. Growth took place entirely in the US; partly due to economic troubles in Europe, revenue in the UK was down slightly (about 84% of revenue came from the US) though this was entirely due to changes in exchange rates.

Signet’s closest peer is the higher-end Tiffany & Co (NYSE:TIF), which also has a slightly higher market cap at $7 billion compared to SIG’s $4 billion. Tiffany has underperformed SIG in the market and is down about 16% so far in 2012, leading it to trade at similarly low P/E multiples of 16 on a trailing basis and 13 on a forward basis. Its EBITDA multiple is 8, as opposed to Signet’s 7. Signet therefore seems to be a better value than Tiffany, and grew its earnings at a higher rate in Q1 than TIF did. Another peer to consider is Luxottica (NYSE:LUX), which manufactures eyewear and also serves as a retailer of luxury brands. Luxottica has been growing at a faster rate than Signet but trades at a significantly higher multiple. Its forward P/E, which captures analyst expectations for growth, is 19. We recommend SIG as a value investment undervalued compared to its peers.

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