The Tiffany & Co. (NYSE:TIF) share price has come under pressure in recent times as investors become concerned by the impact lower tourism levels in the United States will have on its business. But with the U.S. dollar weakening and President Trump struggling to pass a number of his policies, we think Tiffany is poised to have a stronger-than-expected year.
Tiffany's main source of revenue is derived from its homeland in America where 46% of its total sales are generated. A good portion of this can be attributed to tourists that are drawn to its iconic Fifth Avenue store. This store contributes roughly 20% of its U.S. sales, with around 40% of the store's sales coming from tourists. So with tourism figures worryingly down since President Trump took office, investors have no doubt been concerned that Tiffany could be impacted negatively. Whilst the early signs have not been good, we believe that things are about to pick up for the company.
The backlash from Trump's proposed policies on immigration was seemingly clear to be seen in February when it was estimated that Trump had cost the economy around $185 million already from falling tourism. Furthermore, shortly after Trump entered the White House, searches for flights to the United States from overseas were down by close to 10% according to airfare tracker Hopper, potentially spelling further trouble down the line. But whilst Trump no doubt played a role in this, we do feel the strong U.S. dollar played the greater role. After all, tourism numbers from the countries that Trump wants to blacklist contribute little to overall inbound tourism.
We think the main culprit was a strong U.S. dollar which was predicted to strengthen even more as Trump's reflationary policies came into effect. Visitor numbers and tourism spending has a tendency to increase when a country's currency is weak, and vice versa when a country's currency is strong. Take for example Australia. Inbound tourism has grown at an extraordinary rate since its currency weakened in the last few years.
As you can see above, the U.S. dollar index, which measures the local currency against a basket of currencies, strengthened significantly after Trump's election victory. But Trump's failure to pass many of his policies, including the travel ban, has led many to believe that the Trump trade is dead. With the market's inflation expectations subdued, the need for the Fed to increase rates at a quicker-than-expected pace has been quashed, and the U.S. dollar has retreated appropriately.
A further boost has come recently from a strengthening Euro (NYSEARCA:FXE). At this stage the market appears to believe that Independent candidate Emmanuel Macron is on course to win the French election. As a result, any danger of France following Britain out of the European Union have been abated, at least for now. While far-right leader candidate Marine Le Pen, whose policies include leaving the European Union, has an outside chance of winning, the Euro is certainly being priced from a Macron victory. This can be seen below.
This is great news for Tiffany. We see a weaker dollar as a big win for the company. Not only could it result in increased tourism and spending by tourists, it will give its international earnings a lift when translated back into dollars. Management was expecting the dollar to weigh heavily on its international segment in FY 2017. So much so it has been quietly raising prices in many overseas markets to compensate. With these price increases and a weaker dollar, we think Tiffany's international sales could end up being a key highlight this year.
Especially if Tiffany's presence in the Asia-Pacific region continues to grow as strongly as it has. The company opened seven new stores in the region throughout 2016. Three of these stores were in Mainland China, expanding its presence in the country to 31 stores. With more stores due to be opened in the region in FY 2017, it is expanding its presence at a time when Chinese luxury spending is on the increase once again.
So with things looking a lot rosier than they were several months ago, we think Tiffany & Co. could prove to be a great investment over the next 12 months if the U.S. dollar remains in a weakened position as we believe it will. For FY 2017 management has forecast mid-single digit percentage growth on last year's adjusted $3.75 earnings per share. But this was prior to the dollar weakening. Thanks to the potential boost to tourism spending and its international earnings, we expect to see high-single digit earnings growth this year, ultimately leading to an adjusted $4.05 earnings per share.
Based on a price-to-earnings ratio of 25, which we deem to be historically fair, we have a price target of $101.25 on Tiffany's shares. This equates to a potential return of 9% over the next 12 months from the last close price. In our opinion this is a great return on investment with further upside potential over the following 12 months as well. Because of this we are long Tiffany.
Disclosure: I am/we are long TIF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.