What is your opinion on Coach, Inc.(COH)?
Greetings my fellow Fools,
I would greatly appreciate your opinion on Coach (COH), which dropped about 15% today.
I am a Coach shareholder, and of the opinion that they are a pretty soild investment at today's prices. However, despite being 23 years old, i've only been studying investing for a mere two years. Therefore, when it comes to investing, I am the equivalent of a toddler that has just learned to walk, and has a vocabulary of about 15 words. And that is why I would love to hear what you, more developed Fools, have to say.
First, here are some points about Coach's last 10 years (2003-2012) that get me really excited.
FYI: Most of the data below was pulled from Morningstar here: http://financials.morningstar.com/ratios/r.html?t=COH®ion=USA&culture=en-us
1. Coach has consistently maintained a profitability that is almost hard to comprehend:
-Over the past decade, Coach was consistently among the top 1 or 2% most profitable companies in capitalism. During the past decade, COH’s WORST annual return on equity was 38.8% for 2009. The ten year average is 46.1%. In fact 2012 was COH’s BEST year in that category at a 57.63% ROE.
-COH’s return on capital was nearly identical with ROE due to the lack of debt/leverage the company employed. ROC averaged 45.2% compared to ROE averaging 46.1%.
This is for a company that, over the past decade hasn’t had a debt/equity ratio over 0.02. They generally have had either zero or almost zero debt.
-Value Line does a screen across all stocks they cover (About 2600 stocks) called “High Returns on Earned on Total Capital.” The criterion is: “Stocks with high average returns on capital in last 5 years ranked by earnings retained to common equity.” Coach, Inc. ranked #24 on this list (just above Mastercard and below Accenture) with an average of 48% returned on capital and 42% being the average retained to common equity. Placing 24th out of 2600 suggests that COH has been among the top 1% of companies in terms of profitability.
-Free cash flow as a % of shares has averaged over 20% over the past 10 years.
-Sales per square foot for Coach is #3 in the world behind Apple and Tiffany. See below:
2.Growth has been consistent and wonderful:
-Earnings has increased EPS 9 out of the past 10 years (2009 being the down year with a 12% drop during the crisis) COH’s 10 yr average EPS growth rate is 30%.
-Free cash flows have grown at the 10 year annualized rate of 22.62% and a 5 year annualized rate of 10.2%, and that’s including the financial crisis.
3. Coach has successful, tenured, shareholder friendly management.
-Lew Frankfort has been at the helm for 18 years. He started running the ship in 1995 - five years before COH’s 2000 spinoff from Sara Lee. He’s done a brilliant job since, as my previous data has clearly shown. The stock has been a 25-bagger since 2003. That’s pretty nice.
-Since 2008, the company has bought back 18.8% of its outstanding shares, at an annualized rate of 4.1% annually since 2008. They also have a dividend yielding only about 1.9% but that dividend has been growing fast, doubling since 2010.
4. Valuation seems attractive for such a consistently impressive business
-14.2x TTM EPS
-15x TTM Free cash flow per share
Now comes the bad news:
The bear case is that Michael Kors and others, are wearing down the "Moat" that Coach has enjoyed for the past decade and that the past years of epic growth and profitability are over. While this may be true, to a point, I find it hard to believe that it could happen so quickly, after so many years of consistent dominance. Castles arn't typically built in a day, nor are they destroyed in a day.
My (potentially false) assumption:
Even IF COH's days of dominance are "over the hill", I don't believe that COH will drop from ROE over 40% for 10 years to 10% just like that. (Right?) Growth wont avereage 30% for a deacde and then just stop completely in one year. (Right?) I picture Coach like a freight train, and even if it has had the brakes applied, it will still be a gradual reduction in dominance over many years. Over that time, the company will still do above average for quite a while and do well for shareholders.
Even if ROE and EPS growth are cut in HALF by Michael Kors and others, Coach is still an attractive investment, in my opinion. That's why I increased my current COH position 66% today.
Now, the fun part:
I need to YOU to tell me whether you think i'm an idiot or not.
I'd really appreciate hearing what ya'll think of COH as an investment.