Summary
- Tiffany & Co. is a world-class brand name with massive equity value.
- It has a stellar balance sheet and is trading at $120, below the $135 LVMH buyout price.
- If you believe the merger will occur, and we do, there are great ways to profit using options.
- Selling puts against Tiffany stock is a way to take advantage of the merger discount currently baked into the stock price.
Thesis
Jewelry can be a tricky business.
It can be even trickier when there’s a buyout on the table, but the pandemic has thrown the deal into question. So, on top of the jewelry business itself comes uncertainty about what happens to the business after the pandemic and the merger.
But uncertainty creates opportunity. So, before we jump into the details surrounding Tiffany & Co. (TIF), let’s first talk about the macro issues concerning the jewelry business.
The jewelry business has three variables to consider.
The first is an element that is constantly in the sector's favor. People always desire jewelry, especially women. Thanks to the greatest marketing campaign of all-time led by DeBeers ("A Diamond is Forever"), diamonds are now considered a virtual requirement anytime anyone gets married in just about every culture around the world.
So, while there is a certain base-level theoretical demand that always exists, the second variable is that the economy does play a role in whether that demand is fulfilled. We are now in a period, because of COVID-19, where that demand will not be acted upon as it is in boom times.
The third variable is that there are three tiers of jewelry providers. There are high-end jewelry companies like Tiffany. There's also the middle-market, which is where Signet Jewelers Limited (SIG) operates. Then, there is the discount business.
Tiffany owns about 55% market share in jewelry collections, 26% of the engagement jewelry market and 12% of the designer jewelry market. These are big numbers in a highly fragmented market. That’s because Tiffany enjoys fantastic brand recognition. Every woman, and many men, know what “the little blue box” means. Tiffany’s is associated with elegance and luxury. That’s why they were purchased by LVMH (OTCPK:LVMUY), which has a host of luxury brands in its portfolio.
Tiffany’s brand is so strong that it doesn’t have to have stories everywhere in the way that Signet does with its massive footprint. Tiffany’s only sports 326 stores through the world, of which only 40% are in the US. That’s different from Signet because Tiffany’s brand is so powerful that it speaks to cultures all over the world.
