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The (Apple) Pressure Is on for This Watchmaker

The highly anticipated Apple (AAPL) Watch will hit the shelves in just a couple of weeks – and the market is already in a full frenzy over the release.

It’s expected to lead more young people to wear watches, with Apple forecast to sell 30 million units in its first year.

There’s no doubt that this latest smartwatch poses a serious threat to the traditional watchmaking industry, akin to how the Japanese disrupted the industry in the 1970s with the introduction of cheap quartz watches.

And while high-end watchmakers may escape the competitive pressure that Apple is putting on the industry, others face more of a challenge from the latest industry disruption.

Including this company, which seems to have fooled investors this week…

The Classics Never Die… or Do They?

American and European high-end watchmakers believe that the onset of smartwatches – and now the Apple Watch – has provided a great opportunity for traditional watchmakers to make a comeback.

You see, after years of declining sales, the trend towards wearing classic timepieces is accelerating again.

Indeed, investors seem to believe that trend has already taken root.

Just look at Movado Group (MOV). The New Jersey-based luxury watchmaker’s shares spiked by nearly 25% in the two-day trading span that ended at Wednesday’s close.

After reporting better-than-expected quarterly net income, while also issuing stronger full-year guidance, MOV shares closed on Wednesday at $30.91 – pushing the stock up by 8.9% year to date.

But is it a real comeback?

Mixed Results, but Stronger Guidance

For the fourth quarter, Movado reported that sales decreased by 4.4% to $133.9 million – results that were affected by the stronger dollar, which chopped $4.1 million off the revenue number.

The revenue total missed analysts’ estimates of $134.7 million for the quarter.

Gross profit was $67.4 million, or 9.2% lower than the $74.3 million reported in the same quarter a year ago.

But the item that sparked most investor interest was the net income result. Although down for the quarter, it was better than expected, with Movado reporting quarterly net income of $10.1 million ($0.40 per diluted share), compared with $12 million ($0.46 per diluted share) in the same period a year ago.

Now, despite that 15.8% decrease, the stock caught fire on the news, because consensus estimates were just $0.20 per diluted share for the quarter.

Whenever a company sees better-than-expected numbers – and in this case, a doubling of expectations – it triggers a feeding frenzy.

In addition, management announced several actions intended to improve Movado’s FY2016 results. That includes selective price increases, which are partly designed to offset the continuing strength of the dollar, which the company expects to last at least through 2016.

Despite the currency headwinds, Movado anticipates earning between $2.00 and $2.10 per share in the current fiscal year on revenue between $590 million and $600 million. This represents a 5.8% to 11.1% premium to current earnings estimates of $1.89 per share.

But I’m afraid that’s where the good news ends…

Time to Buy This Timekeeper?

While high-end watchmakers don’t seem to be too concerned with the bevy of smartwatches getting ready to hit the markets en masse, Movado could feel some significant effects from the increased competition.

You see, Movado sells watches in the $300 to $3,000 end of the luxury pool, whereas high-end Swiss makers remain safely protected in the $10,000-plus area – out of reach of even the most aggressive smartwatch makers.

While Movado could conceivably reach the low end of its updated guidance, that’s about the best it can do. So it has almost no chance of reaching $2.10 in earnings per share (EPS) this year.

Even if the company does do the impossible and hits $2.10 EPS this year, putting a reasonable 15 P/E multiple on the stock gives MOV shares a price of $31.50 – meaning the stock is now effectively fully valued.

And if earnings come in at the low end of the range, even at $30, the stock is slightly overvalued – and significantly so if the earnings come closer to consensus estimates.

In the end, there isn’t enough room for the profit potential to justify the risk, so it’s time to shut the case on this watchmaker.

Good investing,

Richard Robinson

Richard Robinson

, Ph.D., Equities Analyst

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