Value
Signet Jewelers Limited
By: Tracey Ryniec
March 05, 2010 |
SIG

Signet Jewelers Ltd. (SIG - Analyst Report) will soon be reporting results from its holiday quarter. Did the demise of some of its competitors boost the bottom line?

Company Description

Signet Jewelers is a specialty jewelry retailer. The company operates 1,948 stores, including 1,394 stores in the U.S. under the names of Kay Jewelers, Jared The Galleria of Jewelry and others.

In the UK, where it operates 554 stores, its brands included H.Samuel, Ernest Jones, and Leslie Davis.

Zacks Consensus Estimates Rise

Signet is scheduled to report fiscal fourth-quarter results on Mar 25.

In the past 2 months, estimates have been rising for the fiscal fourth quarter, the full year and fiscal 2011.

The fourth quarter Zacks Consensus Estimates have risen to $1.20 from $1.11 during that time.

Meanwhile, the fiscal 2010 Zacks Consensus jumped 15 cents to $1.80 per share. This is year over year earnings growth of 14.97%.

One estimate moved higher in the last 30 days for fiscal 2011 to $1.96 from $1.89 per share.

Signet Has a History of Surprising on the Zacks Consensus Estimate

Signet has surprised four quarters in a row by an average of 35.26%. On Nov 24, the company surprised by 52.94% in the fiscal third quarter.

Earnings per share were a loss of 8 cents. Analysts expected things to be much worse, forecasting a loss of 17 cents.

Sales declined 2.5% to $613.7 million. Buy the company saw improvement in the third quarter, especially in the diamond category at both Ernest Jones and H. Samuel stores and also overall at Ernest Jones stores.

Tight inventory controls also boosted the quarter.

With an overall solid holiday period by retailers, there are high expectations for Signet to show similar improvement for the fourth quarter.

Value Fundamentals

Signet is a Zacks #1 Rank (strong buy) stock. It has a forward P/E of 14.7 and a price-to-book ratio of 1.46. The company has a 5-year average return on equity (ROE) of 13.7%.

A stock's Earnings Yield measures just that: the anticipated yield (or return) an investment in a stock could give you based on the earnings and the price paid for the stock.
The calculation is the inverse of the P/E ratio.
The P/E of course is the Price / Earnings
So a stock trading at a Price of $35 with Earnings of $3 has a P/E ratio of 11.67, which means it's selling at 11.67 times earnings. Another way of looking at it is you're paying $11.67 for $1 of earnings.

The Earnings Yield is calculated as Earnings / Price
Using the example above, a stock with $3 of Earnings trading at a Price of $35 ($3 / $35) has an earnings yield of 0.0857 or 8.57%. The Earnings Yield, also known as the E/P Ratio, is expressed as a percentage. So a yield of 8.57% would also mean 8.57 cents of earnings for $1 of investment.

Of course, this is all potential because prices and earnings change.

The most common way people will use this ratio is to compare it to other stocks and to compare the yields to the 10 Year T-Bill.

Conventional wisdom has it that if the yield on the stock market (S&P 500 for example) is lower than the yield on the 10 Year Treasury (3.71% as of 3/15/10), then stocks might be considered overvalued.

If the yield on the S&P 500 is greater than the 10 Year T-Bill, stocks would be considered undervalued.

The theory behind this is that Bonds and Stocks are competing for investors' dollars. And to attract investment interest in stocks, a higher yield needs to be paid to the stock investor for the extra risk he's assuming compared to the virtual risk-free investment offered in US backed Treasuries.

If earnings go up, the yield goes up. If earnings go down, so does the yield.

Prices also affect the yield. If Prices go up, the yield goes down. And if prices go down, the yield goes up.

In June of 2007, the Yield on the 10 Yr. T-Bill was 4.95%.

However, the Earnings Yield on the S&P 500 was 4.19%.

Not much of a risk premium on a risk based investment.

Remember, if the Earnings Yield on stocks is below the T-Bill rate, stocks are considered overvalued. (I should point out that within months, the market began to falter.)

I also happened to write about this in March of 2009. At that time, the Earnings Yield on the S&P 500 using the 12 Month Projected Earnings Estimate was 9.51%, compared to the 10 Yr. Treasury of 2.89%.

With yields well above the 10 Year, conventional wisdom said that stocks were 'undervalued'. Of course, they could have continued to get more undervalued. But the market was quickly bid up ?? resulting in one of the largest rallies we've ever seen.

So where is it now?

Currently, the Earnings Yield for the S&P is 7.01%, compared to the 10 Yr. Treasury of 3.71%.

So the market isn't as much of a bargain as it was back in March of '09. But it's still way better than the 10 year and suggests that stocks are still the more attractive investment.

The screen I'm running today looks for the following:

Price greater than or equal to $5
Volume (Avg. 20 Day Shares) greater than or equal to 100,000
Earnings Yield greater than or equal to 5%
(For those using the Research Wizard, the calculation looks like this:
(i642/i5)*100

That's the 12 Month Forward Looking Estimate (i642) divided by the Current Price (i5))

12 Month Projected Growth Rate greater than or equal to 10
Zacks Rank equal to 1
Here are 5 stocks from this week's screen (for Tuesday, 3/16/10):

CSL - Snapshot Report Carlisle Companies Inc.
CSCO - Analyst Report Cisco Systems, Inc.
MOLX - Analyst Report Molex Inc.
SIG - Analyst Report Signet Jewelers Ltd.
WHR - Analyst Report Whirlpool Corp.

take profit