Does Tiffany's Buyback Glitter?

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Despite all the talk of constriction in the credit markets, Wall Street's buyback binge continues. The most recent member of this increasingly non-exclusive club is also perhaps the world's most exclusive retailer: Tiffany (NYSE: TIF). The jewelry merchant announced a share repurchase authorization yesterday that nearly quintupled the size of its existing authorization to $637 million -- 12% of the company's market cap.  

Investors looked at the news with sparkling eyes this morning, bidding up shares in a down market. But Foolish investors might want to look twice at this one. Because 12% of a $5 billion company is quite the pretty penny, Tiffany should face a couple of questions its customers ask themselves daily: Can I really afford this? And even if I can, is this a prudent purchase? We'll tackle both those questions today.

Can it pay?
Not all at once. Tiffany has just less than $400 million in the bank today, against long-term debt slightly greater than that. Fortunately, Tiffany's board has given the company three years to make its purchases, giving management the flexibility to pick and choose its buy points. Also fortunately, after several years in which the company barely broke even on a cash profits basis, Tiffany is now generating significant free cash flow -- more than $150 million over the past 12 months. Between the company's cash on hand, and its ability to generate more of the green stuff, I'd say the buyback stands a realistic chance of being completed within three years.

Should it pay?
Not in my opinion, no. Comparing Tiffany with peers is difficult because ... who's on par with Tiffany? Exclusivity is the company's very raison d'etre. But looking at a couple of companies that are at least in the same line of business suggests to me that Tiffany is no bargain today.

	Trailing P/E	Trailing Price-to-Free Cash Flow	Projected Growth Rate
Tiffany	16	32	13%
Zale (NYSE: ZLC)	12	9	9%
Blue Nile (Nasdaq: NILE)	53	27	24%

Data from Yahoo! Finance.

Granted, Tiffany's rarely a bargain -- that's sort of a given. Also granted, from a PEG perspective, the company's 1.2 ratio doesn't look half bad, and it's cheaper than its down-market rivals. But hold these firms' cash profits to the light, and Tiffany doesn't exactly sparkle. Its price-to-free cash flow ratio is by far the priciest of the bunch, whereas Blue Nile and Zale actually look as reasonably priced as their wares.

Foolish takeaway
Now, I don't expect Tiffany's management to look at things this way. After all, in conducting its most recent buybacks, the company has been willing to pay nearly $45 per share for its stock -- 16% more than what those now-repurchased shares are currently worth. Chances look good to me that management will decide that its shares are now on sale, and begin buying immediately.

But that doesn't mean you should make the same mistake.

Get glamorous with more Foolishness:

• Foolish Forecast: Tiffany's Hot Ice
• Tiffany's: Pretty, but Pricey
• A Glittering Season For Tiffany's