Tiffany & Co. Equity Valuation and Analysis

1 Tiffany & Co. Equity Valuation and Analysis Valued at April 1, 2005 chelsea Fitzgerald: Whitney Valdes: Eric Richardson: Sean Bancroft: Kristen Weaver: - 1 - Tiffany & Co. Valuation Table of Contents Executive Summary 2 Business/Industry Analysis 5 Accounting Analysis 14 Ratio Analysis /Forecasting 25 Cross Sectional Analysis 28 Forecasted Financials 37 Valuation Analysis 41 Cost of Capital 44 Intrinsic Valuations 46 Appendices 57 Appendix A 57 Appendix B 60 Appendix C 66 Appendix D 69 References 72

2 - 2 -EXECUTIVE SUMMARY Investment Recommendation: Over-valued, Sell 4/1/05 EPS Forecast FYE 1/31 2004(A) 2005E 2006E 2007E EPS $ $ $ $ Ratio Comparison Tiffany Industry Trailing P/E Forward P/E Forward PEG.

3 96 M/B Valuation Estimates Actual Current Price $ Ratio Based Valuations P/E Trailing $ P/E Forward $ PEG Forward $ Dividend Yield N/A M/B $ ford Epic Valuation $ Intrinsic

4 Valuations Discounted Dividends $ Free Cash Flows $ Residual Income $ Abnormal Earnings Growth $ Long-Run Residual Income Perpetuity $ TIF NYSE $ 52 week range $ Revenue (2004) $ Bil.

5 Market Capitalization $ Bil Shares Outstanding 145,730,000 Dividend Yield .72% 3-month Avg Daily Trading Volume 1,186,500 Percent Institutional Ownership Book Value Per Share (mrq) $ ROE ROA Est. 5 year EPS Growth Rate Cost of Capital Est. R2 Beta Ke Ke Estimated 5-year.

6 3175 3-year .5676 2-year .4929 Published Kd WACC - 3 - Tiffany & Co. is established as one of the world s top retailers of fine jewelry and other luxury items. They have created a place in the market based upon their commitment to quality and customer service. Their name and reputation are the foundation of their success in the industry.

7 They have two main domestic competitors, Whitehall and Zale Corp. These are the only two companies who compete on the same quality level as Tiffany & Co. The threat of new competitors in this market is low due to certain barriers to entry. The nature of Tiffany s business is such that suppliers have significant power over this industry. In terms of Tiffany s accounting policies, they appear rather conservative. Their accounting disclosure seems to be truthful and rather transparent. Tiffany & Co. has a history of stable accounting practices which is an assuring factor that there is no manipulation present. In its annual reports, Tiffany discloses any potential negative information affecting the firm.

8 This shows that management is confident in this company s strong foundation which, once again, proves the lack of need for manipulation. By computing core financial ratios, such as the current ratio, we were able to get a better handle on Tiffany 's overall performance compared to its competitors in the industry. Inventory turnover is relatively low, and gross profit margin is high due to Tiffany s competition strategy of differentiation based on quality. This is not unusual for the industry though; investors tend to see this trend in luxury markets. - 4 - By forecasting the company's financial statements over the next ten years, we were able to understand more clearly the position Tiffany will be in over that time.

9 We believe that Tiffany & Co. will continue to grow at the current steady rate without any unforeseen abnormalities. It was of utmost importance that these forecasts be calculated as accurately as possible since they are the key factor in valuing the company. After thorough Analysis , we have found Tiffany stock to be overvalued by the market. All of our Valuation methods, except the ford Epic Database, showed Tiffany 's stock as considerably overvalued. We strongly believe in our own Valuation models, and therefore, do not take into consideration the Epic Valuation when making our recommendation.

10 The discounted dividend model is the only other unreliable Valuation method for Tiffany . Due to Tiffany s low dividend payout rate, this model yielded a value of $ which is clearly inaccurate. With the exception of these two models, all other models averaged out to a share value of $ which is obviously lower than the $ market trading price. Based on this in-depth Valuation Analysis , we find Tiffany & Co overvalued and strongly recommend selling. - 5 -BUSINESS/INDUSTRY Analysis Company Overview Tiffany & Co. (TIF) sells fine jewelry, timepieces, sterling silver goods, china, crystal, stationery, fragrances, and personal accessories.