Fly First Class With Coach

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

Coach (NYSE: 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.  They now also offer sun wear, watches, fragrances, foot wear, and jewelry.

With over 800 stores worldwide (most in the USA, Canada, and Japan) and growing especially fast in China where the middle class is expected to double from 300 to 600 million in the near future, Coach is poised to become a global leader in luxury goods.

Coach is currently trading at $56.64, which is about 28% below its 52-week high of $79.70.  

Figure 1:

<img src="/media/images/user_14634/coach-chart-caps_large.png" />

 

So is Coach a buy at these current levels?  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?  We can attribute it to a mid year miss followed by lackluster growth predictions.  Sure there were a couple other things such as the discontinuation of coupons and concerns about overseas profits, but I'm going to make this short.

What has changed since then?  In October Coach said that for fiscal year 2012 it would expect to achieve double digit sales with earnings per share growth ahead of the top line.  It also reaffirmed revenue guidance for fiscal year 2013.

Therefore, the major catalyst for its downturn seems to have been confronted and resolved.  Share buy backs are almost always a positive thing and Coach has announced that as well.

What exactly are we getting for our $56.64?  We are buying a company with a rock solid balance sheet.  With practically zero debt and roughly $750 million in cash this company is better than rock solid, it's granite tough.  

We are buying a top performer.  According to RetailSails 2012 Chain Store Productivity Guide Coach ranks 4th out of retailers in terms of sales per square foot at $1,871 sq/ft.  Trailing Apple (NASDAQ: AAPL) at $6,050 sq/ft,  Tiffany & Co. (NYSE: TIF) at $3,017 sq/ft, and lululemon athletica (NASDAQ: LULU) at $1,936 sq/ft.

The great balance sheet and strong performance are no flukes on management's part as evidenced by a RoE of 52.40% and a RoA of 33.20%, well above the industry average (see Figure 2).  The recent downturn in stock price has provided very compelling valuations.  A P/E of 15.80 means that this company is currently undervalued compared to the industry average of 21.50.  A dividend yield of 2.13% 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 with its 5 year at 21.40% vs an industry average of 9.10%. Finally, the forward P/E of 12.73 and an expected 5 year PEG of 1.07 means analysts are pointing toward a positive future.  With a CEO that has been part of the company for 30 years I think we can expect this kind of quality management to continue.

Figure 2:

<table> <tbody> <tr> <td>Valuations</td> <td>Coach</td> <td>Industry</td> </tr> <tr> <td> <p>P/E</p> </td> <td>15.80</td> <td>21.50</td> </tr> <tr> <td>Yield</td> <td>2.13%</td> <td>1%</td> </tr> <tr> <td>5 Year Growth Rates  </td> <td>10.62%</td> <td>5.11%</td> </tr> <tr> <td>Profit Margins</td> <td>21.40%</td> <td>9.10%</td> </tr> <tr> <td>Return on Equity</td> <td>52.40%</td> <td>19.30%</td> </tr> <tr> <td>Return on Assets</td> <td>33.20%</td> <td>13.10%</td> </tr> </tbody> </table>

Not only does Coach present a compelling value, with good growth projections, but it seems to be setting up for a technical bounce going into the holidays and beyond.  Based on recent price action I would peg $56/$57 as a reasonable entry point.  My 12 month price target is $88 taking into account growth rates and fair valuation.  I am personally looking very closely at Coach for a long term hold if fundamentals stay intact.


Lulupoopsalot has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Coach, and Tiffany & Co. Motley Fool newsletter services recommend Apple, Coach, and Lululemon Athletica. 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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