Royce Investment Partners revealed earlier this week it boosted its stake in Movado Group Inc. (MOV, Financial) by 20.4%.
The New York-based firm, which was founded in 1972 by Chuck Royce (Trades, Portfolio), specializes in small-cap companies. The portfolio management team picks stocks based on an active, bottom-up, risk-conscious and fundamental approach. They also search for value opportunities among companies trading at a discount to enterprise value.
Movado investment
According to GuruFocus Real-Time Picks, a Premium feature based on 13D, 13G and Form 4 filings, the firm picked up 271,265 shares of the luxury watchmaker on Nov. 30. The transaction had an impact of 0.10% on the equity portfolio. The stock traded for an average price of $32.19 per share on the day of the purchase.
It now holds a total of 1.6 million shares, which occupy 0.58% of the equity portfolio. GuruFocus estimates the firm has lost 0.96% so far on the long-held investment.
In a recent podcast, Charlie Dreifus, the portfolio manager of the Royce Small-Cap Special Equity Fund, noted the company, which is headquartered in Paramus, New Jersey, is “making strides and expanding at a fairly rapid pace.”
Valuation
Known for its watches under the Ebel, Concord, Movado, Olivia Burton and MVMT brands, Movado also makes jewelry and has private labels with designers like Calvin Klein, Coach and Tommy Hilfiger, among others.
The company has a $696.70 million market cap and an enterprise value of $594.64 million; its shares were trading around $31.68 on Thursday with a price-earnings ratio of 7.04, a price-book ratio of 1.46 and a price-sales ratio of 0.96.
The GF Value Line suggests the stock is fairly valued currently based on its historical ratios, past financial performance and analysts’ future earnings projections.
Further, the GF Score of 78 out of 100 indicates the company is likely to have average performance going forward. While it received high profitability, financial strength and momentum ratings, the GF Value rank was more moderate and growth was low.
Earnings update
Movado reported its fiscal third-quarter 2023 financial results on Nov. 22.
For the three months ended Oct. 31, the company posted revenue of $211.4 million, which was down 2.9% from the prior-year quarter. Its net income of $29.3 million, or $1.36 per share on an adjusted basis, also decreased from $31.4 million, or $1.36 per share, last year.
Further, the company’s balance sheet is fairly solid with $186 million in cash and $82 million in short- and long-term capital lease obligations. It has no debt.
In a statement, Chairman and CEO Efraim Grinberg noted the company’s offerings “continued to resonate with customers around the globe,” which led to a 10.2% increase in international sales. However, sales in the U.S. were down from the year-ago quarter on the back of rising inflation.
Regardless, he emphasized the company is “well positioned for this holiday season.”
“As consumers in our key markets experience inflationary pressure, we are updating our annual outlook to reflect currency headwinds and a softer spending environment,” Grinberg said. “Along those lines, we have an outstanding product pipeline across our portfolio, and are especially excited about our new Alta collection in Movado.”
Looking ahead, the company now expects $740 million to $750 million in sales for full fiscal 2023, which is down from its previous outlook of $780 million to $790 million. Further, operating income projections were lowered from a range of $125 million to $130 million to between $120 million and $125 million.
Dreifus noted in his podcast that despite the “lackluster” sales and weakness in North America, Movado’s guidance still makes the stock look “very attractive.”
“This company, after the year ends, after their inventories and receivables turn to cash, has an incredible balance sheet, the likes of which would entice Warren Buffett (Trades, Portfolio)'s mentor Ben Graham because it would qualify as a net-net working capital candidate,” he said.
Dividend
Another factor that may make the stock attractive is its dividend. The company pays a quarterly distribution of 35 cents per share. GuruFocus noted the dividend yield of 4.47% is currently near a two-year high. The payout ratio is 0.29.
Financial strength and profitability
GuruFocus rated Movado’s financial strength 8 out of 10 on the back of a comfortable level of interest coverage and a safe Altman Z-Score of 4.44. Assets are building up at a faster rate than revenue is growing, however, so it may be becoming less efficient. Value is being created as the company grows since the return on invested capital eclipses the weighted average cost of capital.
The company’s profitability also fared well with a 7 out of 10 rating. Although the operating margin has declined, it is still outperforming versus competitors as well as its own history. Further, the returns on equity, assets and capital top a majority of industry peers. Movado is also supported by a high Piotroski F-Score of 7 out of 9, meaning conditions are healthy, and a predictability rank of one out of five stars. GuruFocus research found companies with this rank return an average of 1.1% annually over a 10-year period.
Guru shareholders
Of the gurus invested in Movado, Royce’s firm has the largest stake with 7.20% of its outstanding shares. The stock is also being held by Mario Gabelli (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Jeremy Grantham (Trades, Portfolio), John Hussman (Trades, Portfolio) and Murray Stahl (Trades, Portfolio).
Portfolio composition and performance
Royce Investment Partners’ $8.84 billion equity portfolio, which the 13F filing showed was composed of 931 stocks as of the end of the third quarter, is most heavily invested in the industrials, technology, consumer cyclical and financial services sectors.
Other retail stocks the firm was invested in as of Sept. 30 included Carter’s Inc. (CRI, Financial), Franchise Group Inc. (FRG, Financial), Murphy USA Inc. (MUSA, Financial), Macy’s Inc. (M, Financial) and Joann Inc. (JOAN, Financial).
The Royce Premier Fund returned 16.36% in 2021, underperforming the S&P 500 Index’s return of 28.7% and outperforming the Russell 2000’s 13.69% return.
Investors should be aware 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
