In A 'Blue Sky' Scenario, Signet Jewelers Could Regain Shine And Double In Value

Shares of Signet Jewelers Ltd. SIG have fallen about 40 percent since the start of 2017, but analysts at Bank of America are confident a rebound can be seen.

Bank of America's Lorraine Hutchinson maintains a Buy rating on Signet's stock with an unchanged $75 price target despite the company "weathering a challenging sales period." Specifically, government data on jewelry spending habits and the company's proprietary research suggest Signet is losing market share and underperformed the broader index over the past two quarters.

However, Signet likely saw a positive Mother's Day period comp which may signal an initial comp stabilization, the analyst added. But even factoring in softer sales ahead the case can be made for upside in the stock.

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Hutchinson is now modeling Signet to earn $6.69 per share in fiscal 2018, which represents a decrease of 12 cents from prior estimates. Also, Signet's subsidiary Sterling Jewelers is expected to see softer sales (flat 2019 comps versus a prior estimate of 2 percent growth), which will account for potential lost revenue from the transition of 7 percent of credit sales to an outsourced leasing model with Progressive. There is also the potential for depressed credit sales as the company is looking to improve the quality of its sub-prime book.

But even when using the current stock price and assuming a 10x multiple, this implies the market is pricing in just $5 of EPS which represents an 8.5 percent sales decline from fiscal 2017's level - an estimate which is "too severe."

Under a "blue sky scenario" in which Signet's EPS rebounds by 8 percent to $8 and the stock's multiple merely moves to the peer average of 13x, the analyst thinks the stock could double in value.