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Fly First Class With Coach

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November 26, 2012 – Comments (1) | RELATED TICKERS: COH

 

Coach (COH) is a luxury accessories dealer for both men and women.  Headquartered in New York, Coach has been making quality leather goods for over 70 years.  However, they now also offer sun wear, fragrances, and jewelry.

Coach is currently trading at $57.87 which is about 28% below its 52 week high of $79.70.  It is currently forming a solid long term cup bottom (my favorite technical bottom) well below the 200 DMA of $63.91.  So is Coach a value play?  Or a value trap?  Let's take a closer look and see if we should add this to our long term portfolio.

First, what brought about this downturn in the stock?  Well I can attribute it to a mid year miss followed by lackluster growth rate predictions.  Sure there were a few other things but I'm going to make this short.  So what has changed since then?  In October Coach said that for fiscal 2012 it would expect to achieve double digit sales with earnings per share growth ahead of the top line.  It also reaffirmed for 2013.  So one major catalyst, if not the main one, for its downturn seems to have been confronted and resolved.  Share buy backs are also a positive thing and Coach has announced that as well.

So what exactly are we getting for our $57.87?  We are buying a company with a rock solid balance sheet.  With practically zero debt and roughly $750,000,000 in cash this company is better than rock solid, it's granite tough.  The balance sheet is no fluke on managements part as evidenced by a RoE of 52.40 and a RoA of 33.20, well above the industry average.  With a CEO that has been with the company for 30 years I think we can expect this kind of quality management to continue.

The valuations are very compelling.  A P/E of 16.70 means that this company is currently undervalued compared to the industry average of 20.90.  A dividend yield of 2% is actually double that of the industry average of 1%.  Coach's 5 year growth rates are also double that of the industry at 10.62% vs 5.11%  Its profit margins are tops in the industry with its 5 year at 21.40% vs an industry average of 9.10%. Finally, the forward P/E of 13 and a PEG of 1.13 means analysts are pointing toward a positive future.

Not only does Coach present a compelling value, with growth projections, but it seems to be setting up for a technical bounce going into the holidays and beyond.  I am personally looking very closely at Coach for a short term trade with a possible long term hold if fundamentals stay intact.

 

1 Comments – Post Your Own

#1) On November 27, 2012 at 8:55 AM, ElCid16 (98.07) wrote:

Coach is the RL pick I feel most confident about right now.  Net Income CAGR over the past 4 years is about 15%.  But because of share buybacks, EPS CAGR over the past 4 years is about 20%.  The Motley Fool has EPS growth over the past 5 years at 13%, and 20% over the past 3 years.  With cash backed out, the P/E is about 16.  Investors in Coach, right now, only need to see 4-6% long-term EPS growth to make a decent return on their investment.  If growth continues in the mid-double digit range (~15%), this stock could double within a couple of years.  If growth slips to the high single digit range, this stock will still beat the S&P 500.

Long Coach.

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