Harry Winston's Price Cut on Transformation from Diamond Miner to Luxury Retailer

Desjardins Securities changed the valuation methodology for Harry Winston as the diamond miner is transforming into a high-end jewelry retailer, cutting its target price from C$53.50 to C$39.

In a note released on Friday, Desjardins analyst John Hughes wrote that he valued Harry Winston Diamond Corp. (HWD) as more of a high-end luxury retailer and less of a mining company.

"Management continues to emphasize a corporate growth strategy focused on the retail division vs the mining division," he wrote, adding that Harry Winston's revenue was now approaching a 50/50 split between its mining and retail operations. Harry Winston currently operates 18 salons as opposed to 13 at the end of fiscal 2007.

In his new valuation, the analyst modeled his earnings per share and cash flow per share guidance multiples on that of nearest competitor Tiffany & Co. (TIF).

He wrote:

Since 2000, Tiffany & Co has most frequently traded at an earnings multiple of 22x and a CFPS multiple of 11x. Our adjusted valuation of Harry Winston shares uses EPS and CFPS multiples of 25x and 11x, respectively applied to our fiscal year 2010 financial forecasts.

He maintained a "buy" rating on the stock.

The analyst does not expect any substantial change in the company's 40% stake in the Diavik diamond mine in the Northwest Territories and appeared doubtful of  management's efforts to grow the mining division.

Shares in Harry Winston were down another 4% in morning trading Friday to around C$19.73. Just one month ago, on June 18, the stock was trading at C$31.70.