Source: Tiffany

Tiffany (NYSE:TIF) stock has delivered sparkling performance for investors lately, rising by more than 25% over the last year on the back of rock-solid financial performance and shining opportunities for growth in emerging markets. However, the past is only a prologue to the future, investment decisions need to be based on future potential as opposed to past performance. Is now the right time to buy Tiffany stock?

A jewel of a business
Tiffany is arguably the most valuable and recognized brand in the jewelry business. Brand differentiation, a reputation for quality, and exclusive designs mean that products in the iconic blue box sell for substantially higher prices than those of the competition, and this is translated into superior profitability for investors in Tiffany stock.

Based on data from eMarketer, the company comes in third place behind Apple (NASDAQ:AAPL) and Murphy USA (NYSE:MUSA) when it comes to sales per square foot among U.S. retailers. Apple is in the technology business, while Murphy USA benefits from the relatively small size of its convenience stores and the high margins produced by products such as tobacco, so these companies are not particularly comparable against Tiffany.

High-end fashion and accessories brands like Michael Kors (NYSE:CPRI), Lululemon (NASDAQ:LULU), and Coach (NYSE:TPR) are arguably more adequate comparison benchmarks for Tiffany, and the company comes considerably ahead of these stylish retailers in terms of sales per square foot.

Company Sales per square foot
Apple  $4,551
Murphy USA $4,221
Tiffany $3,043
Michael Kors $1,886
Lululemon $1,841
Coach $1,532

Source: eMarketer

Importantly, the business is firing on all cylinders, and emerging markets are particularly attractive growth opportunities for Tiffany. The company delivered better than expected sales and earnings for the last quarter, and in a sign of confidence, management also raised earnings forecasts for the rest of the year.

The company is doing quite well in mature markets such as the Americas, where sales increased by a healthy 9% during the last quarter. The Asia Pacific region is remarkably exciting when it comes to growth potential, sales in that market jumped 14% during the quarter, showing that the Tiffany brand is resonating notoriously well among consumers in high growth emerging markets.

Importantly, Tiffany raised prices across all product categories and regions during the quarter; so the company is proving that it has enough pricing strength to sustain sales growth while also generating improving margins via price increases. This kind of pricing power is a big plus when evaluating Tiffany's competitive differentiation and its ability to continue delivering solid performance in the future.

A distinguished company for a premium price
High-quality jewelry rarely sells for a cheap price, and that seems to be the case with Tiffany stock, too. When comparing valuation ratios for Tiffany versus competitor Signet Jewelers (NYSE:SIG) or with the market in general, the stock trades at higher-than-average valuation ratios.

Tiffany trades at a price to sales ratio of 2.9 times revenues over the last year, versus a price to sales ratio of 2 for Signet Jewelers and a ratio in the area of 1.8 for the average company in the S&P 500 index according to data from Morningstar.

Although the difference is considerable, Tiffany clearly deserves to trade at an above-average valuation when it comes to sales. The company has a particularly solid business protected by product differentiation, which generates superior profitability for investors in Tiffany stock, not only when compared versus companies in other industries but also in comparison to competitors such as Signet Jewelers.

To put the numbers in perspective, Tiffany generated a gross profit margin of 59.9% of sales during the last quarter, considerably higher than the gross profit margin of 33.4% reported by Signet Jewelers during the quarter ending on Aug. 2.

The forward P/E ratio shows that Tiffany trades in line with Signet Jewelers and at a moderate premium versus the S&P 500 Index. The stock carries a forward P/E ratio of 21.2 versus 21.3 for Signet Jewelers and 17.1 for the index as calculated by Morningstar.

  Forward P/E Price to sales
Tiffany 21.2 2.9
Signet Jewelers 21.3 2
S&P 500 17.1 1.8

Data source: Morningstar

It's not hard to justify a valuation premium for Tiffany stock versus the S&P index and Signet Jewelers, and current valuation does not look excessive at all. Tiffany stock is not priced at bargain levels, but it doesn´t need sell for a discount either.

The bottom line
Tiffany is a high-quality business with extraordinary competitive strengths, and the company is delivering remarkable financial performance. Although Tiffany stock trades at a moderate valuation premium, such a premium is more than justified. Tiffany stock is a great candidate to buy and hold for years to come, capitalizing the opportunity to add to the position on any short-term weakness which may arise down the road.