What Does Billionaire Andreas Halvorsen See In This Luxury Stock?

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

We track quarterly 13F filings from hundreds of hedge funds and other notable investors, including billionaire and Tiger Cub Andreas Halvorsen’s Viking Global. Even though the information in 13Fs is a bit old by the time it is released, we’ve actually found that the most popular small cap stocks among hedge funds- as determined by these filings- generate an average excess return of 18 percentage points per year, and think that more strategies are possible as well. We can also use our database to compare individual managers’ filings over time; when we looked through Viking Global’s, we saw that the fund increased its stake in Michael Kors (NYSE: KORS) to a total of over 12 million shares during the first quarter of 2013 (see Halvorsen's stock picks over time).

The company’s 10-K for its most recent fiscal year (which ended in March) show a 68% increase in revenue compared to the previous fiscal year. Growth was led by an impressive 40% increase in comparable store sales; on a geographic basis, North America (the leading source of revenue) increased sales by over 60%, with European revenue more than doubling. Roughly half of Michael Kors’s operating income comes from its retail business, with the wholesale segment performing strongly as well. With costs held down, earnings more than tripled over the course of the year. Growth rates have slowed a bit as the company has increased in size, but fiscal Q4 numbers still show net income up over 130% versus a year earlier.

Michael Kors trades at 32 times trailing earnings, so investors are already pricing in high growth for some time though certainly Kors could easily prove undervalued if growth continues for the next several years at close to current rates. In fact, Wall Street analyst expectations imply a forward P/E of 20 and a five-year PEG ratio of 0.9. We’d note that the stock’s beta is 2.6, demonstrating a tight link to overall macro conditions for the premium apparel and accessories company. In addition to Viking Global’s interest in the stock, Lone Pine Capital--managed by fellow billionaire and Tiger Cub Stephen Mandel--reported a position of 8.1 million shares as of the end of March (find Mandel's favorite stocks).

Upscale accessories designer Coach (NYSE: COH) and fast-growing athletic apparel company Lululemon (NASDAQ: LULU) are two of Michael Kors’s peers. Even Lululemon can’t rival Kors’s rapid growth, but the company still experienced a 31% increase in revenue in its most recent quarter compared to the same period in the previous fiscal year with earnings rising 49%. Yet the stock still trades at a premium to Michael Kors with a trailing P/E of 44, so the market is expecting Lululemon to outperform going forward. Coach’s recent financial performance has been more modest, with single-digit growth rates on both top and bottom lines. With respective trailing and forward earnings multiples of 16 and 14, however, markets are less optimistic here and so the company might still be worth a look.

We can also compare Michael Kors to Tiffany (NYSE: TIF) and Sotheby’s (NYSE: BID), with all three focusing on higher-end products and therefore tied to similar economic trends. Sotheby’s beta is 3.0, while Tiffany’s is 1.9. Each of the two carries a trailing P/E of more than 20; while Sotheby’s is expected to increase its earnings per share significantly in the next year and a half, the forward P/E is still 17 and those analyst projections would reverse the recent decline in revenue the auction services company has been experiencing. As for Tiffany, the $10 billion market cap jeweler had its net income rise only 3% in its fiscal Q1 from its levels a year ago, and so we’re skeptical that the company will grow enough to justify the current valuation.

Michael Kors trades quite expensively, but we’re impressed by its recent financial results. Certainly it’s odd that the company has been growing faster than Lululemon but is valued at lower earnings multiples, and as such might be a better growth stock. It also looks like a good alternative to Tiffany or Sotheby’s, which have struggled somewhat in recent quarters yet have high growth priced in at current levels.

Lululemon has the potential to grow its sales by 10 times if it can penetrate its other markets like it has in Canada, but the competitive landscape is starting to increase. Can Lululemon fight off larger retailers and ultimately deliver huge profits for savvy investors? The Motley Fool answers these questions and more in its most in-depth Lululemon research available. Thousands have already claimed their own premium ticker coverage; gain instant access to your own by clicking here now.

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This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool recommends Coach, Lululemon Athletica, and Sotheby's. The Motley Fool owns shares of Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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