Online Jewelry Sales Heating Up? (NILE)

Generally speaking, it takes one significant analyst call to move a stock 10%.  Yet today, that is exactly what we are seeing in shares of Blue Nile Inc. (NASDAQ: NILE).  Citigroup raised its rating on the online jewelry leader to Buy from Hold this morning.  But where this gets interesting is determining how much better the business is doing.

Citi does maintain from the start that Blue Nile’s fundamentals are improving, and it also noted that Wall Street estimates for the second quarter are reasonable.  Before considering this upgrade, the Thomson Reuters estimates are $0.19 EPS and $67.89 million for this last quarter, and $0.79 EPS and $284.15 million in revenues for the year.  With a $42 share price and a $612 million market cap, that puts the online jewelry retailer’s forward valuations at roughly 50-times earnings and 2.15-times revenues.

One of the benefits here is polished diamond prices being lower by more than 10% from last year’s Q2 period.  Citi’s Mark Mahaney believes that this will give it plenty of room to protect margins at a time when the jewelry industry is consolidating.

Mahaney is also looking for the company to be able to have higher customer conversions, particularly as 90% of its sales involve diamonds.  The other boost will come from the online migration now that the consumer is becoming more comfortable buying online.

Before Mahaney’s upgrade, this one had pulled back some 25% since June’s highs.  But this $42.00+ price compares to a 52-week range of $18.34 to $52.50.  While a 20% to 25% pullback since June’s highs sounds solid, many are going to have a hard time stomaching the earnings ratios.

One issue we would chalk up to part of today’s gains is the large short interest.  We show 4.465 million as the last short interest.  That is close to one-third of its float and is roughly 20-days worth of volume.

While the earnings multiple seems hard to stomach, it was just last week that William Blair raised its rating to an ‘Outperform’ rating.

JULY 14, 2009