China Makes Tiffany a Top Investment

Tiffany (NYSE: TIF  ) is down more than 5% during the last month. It tumbled earlier this year on a weak earnings report and has yet to recover. But this could be offering investors a great buying opportunity. Given its exposure to high-end consumers, Tiffany remains one of the most resilient investments in the market. That's because high-end shoppers are less susceptible to economic declines.

Why shares are weak
On an adjusted basis (adjusted for arbitration proceedings), Tiffany's earnings were $1.47 a share during the fourth quarter. Wall Street was looking for $1.51 a share. And the company also guided 2014 earnings below analysts' expectations. 2014 earnings per share are expected to come in at $4.05 to $4.15, per the company, while Wall Street had been looking for $4.31.

There are bright spots
One of the key opportunities for Tiffany is abroad, namely in the Asian market. During the January-ended quarter, Asia-Pacific sales were up 23% year over year. China should be one of the brightest spots for Tiffany going forward. A decade ago, Tiffany only had 11 stores in China. Now it has 45. And China already has the second-largest jewelry market, but it's set to keep growing given the rising middle-class in the country. Also helping it grow will be the rise in penetration of engagement rings in the country.

There's also a changing dynamic in China that should help Tiffany. In the U.S., it's common practice to give an engagement ring, but not so much in China. About 80% of marriages in the U.S. involve an engagement ring, but that number is as low as 30% in China. With the affluence in China growing, that number could see the same type of growth that engagement rings saw in the U.S. in the mid-1900's. From the 1940's to 1960's, engagement ring usage rose from 10% to 50%.

Another key aspect is that many Chinese residents are shopping at Tiffany abroad. And China travel is increasing, which is a big positive for Tiffany. Tourism by Chinese (those traveling outside of China) has grown by nearly 25% annually over the last decade.

What about the other high-end retailer?
Coach (NYSE: COH  ) is still facing challenges when it comes to its U.S. market share. Michael Kors appears to be taking market share on the domestic front, with Coach's North America same-store sales falling nearly 14% in the December-ended quarter. Coach has been relying more on international markets and the men's business to help hedge the North American decline.

But this fall it could see a return to glory. That's when Coach is launching a new line that is spearheaded by Stuart Vevers. Vevers joined in the fall of last year as creative director. Vevers previously worked at the likes of Mulberry and Louis Vuitton.

The industry gets a little smaller
One risk to Tiffany might be the joining of forces by two of the largest jewelers in the U.S., Signet Jewelers (NYSE: SIG  ) and Zale. The acquisition of Zale by Signet will strengthen Signet's market share to 16% for U.S. retail jewelers.

From an investment perspective, shares of Signet are up big on the acquisition news. Signet is up nearly 28% year to date. That has put Signet's P/E up to 17.5 based on next year's earnings estimates. That's above where the company has historically traded.

The other thing worth noting is that Signet operates on a bit of a different level than Tiffany, catering more to the mid-market versus the high-end market. Signet's key brands are Kay Jewelers and Jared The Galleria Of Jewelry.

How shares stack up
As mentioned, Signet is already trading at a 17.5 forward P/E. Tiffany trades at a slightly higher forward P/E, at 18.3. Meanwhile, Coach's is 14.5. But Tiffany's P/E is still at a slight discount to its 10-year average of 21.5 And both Coach and Tiffany offer investors a dividend yield. Tiffany's dividend yield is at 1.6% and Coach's is at 2.7%. And only one of the 26 analysts following Tiffany have a sell rating on the stock.

Bottom line
Both Coach and Tiffany are brand leaders, holding strong positions in the accessory market. Coach offers a solid dividend yield, but Tiffany has one of the best opportunities out there for tapping into the rising prosperity of China. For investors who still need a high-end retailer in their portfolio, Tiffany is worth a look.

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