An Uncommonly Undervalued Large Cap

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

It can be tough to find a truly undervalued stock in the large-cap space. With tons of analyst coverage and daily news updates, the market tends to get the pricing for these stocks right. But it's really exciting when the market gets it wrong, such as the case with Coach (NYSE: COH)

Coach tumbled nealry 10% last week as the fear that competitors in the North American market are threatening its market share. Fourth-quarter EPS came in at $0.78, below consensus of $0.89. 

The purse and accessories company had enjoyed rising profits for over three years thanks to strength in North American direct-to-consumer businesses and global expansion. But the loss of market share in its key U.S. market is leading to investor concerns. 

For the full year, fiscal 2013 sales came in at slightly more than $1.2 billion versus slightly less than $1.2 billion for the same period last year. Earnings per share were up to $3.73 from $3.53 for the same period last year.

Lew Frankfort, Coach CEO, noted that

We generated strong international results, leveraged the men's opportunity globally, strengthened our digital capabilities and drove excellent initial results in the re-launch of footwear. While we maintained our outstanding profitability levels, we were not satisfied with our performance in the women's handbag and accessories category in North America.

The positives 

Despite concerns of growth in North America, international is still growing nicely for Coach. I think the balance sheet helps with downside protection, where the company has over $1 billion in cash and little-to-no debt, not to mention its 2.5% dividend yield.

The other big key for Coach is its opportunity in footwear and other outerwear. This market presents a vast opportunity for the company, possibly as big as the handbag market. 

Bustling consumer discretionary 

Let's compare Coach to the other major high-end retailers, such as Fossil (NASDAQ: FOSL) and Tiffany (NYSE: TIF). Fossil designs watches and other accessories. Sales are expected to be up 11.5% in fiscal 2013 for Fossil, as it continues retail expansion and new product introduction. 

In recent days, the stock soared some 18% on better-than-expected earnings. The big news was that 2Q EPS was up to $1.15  compared  to $0.92 for the same period last year. Specifically, sales in Europe and Asia beat expectations.  

Fossil is a watch company, with nearly 75% of revenue coming from the sale of watches. Its four key watch segments include fine $4,000-plus watches (i.e. Burberry, Fossil), premium $500-plus (Skagen, Zodiac), contemporary $60-plus (DKNY, Diesel) and mass-market $5-plus (Wal-Mart, Target). I'm also encouraged by Fossil's exposure to the fast-growing Asian market, accounting for 17% of 2012 sales.

After posting 1Q EPS of $1.21, versus $0.93 for the same period last year, Jefferies upgraded the stock's price target to $130. The investment firm cites solid watch sales, up 23% year-over-year in the 1Q, as a big positive. Jefferies believes that Fossil owns 10% of the watch market, with the real kicker being that the global watch business is expected to grow between 7% and 10% annually over the next few years.

Blue box

Meanwhile, Tiffany is the 175 year-old jewelry company famous for the little blue boxes. Jewelry accounts for over 90% of revenue. Meanwhile, the Americas account for around 50% of sales, with other major areas being Asia (20%) and Japan (17%).

Tiffany is looking to open over 15 new stores in fiscal 2014, with the majority in Asia. This will be one of its key markets going forward. During fiscal 1Q 2014, global same-store sales were up 8%, driven by 21% growth in Asia. 

Tiffany is up over 12% the past month, on the back of a string of upgrades…

  • Topeka Capital Markets reiterates buy on July 8, with a $86 price target.
  • Stifel Nicolaus upgrades Tiffany from a hold to a buy, slapping a $92 price target on the stock as of July 15.
  • TheStreet reiterates a buy rating on July 18, noting Tiffany's strengths as "...revenue growth, largely solid financial position with reasonable debt levels by most measures, good cash flow from operations, solid stock price performance and expanding profit margins."

Bottom line

From 2008 up to mid-2012, Coach traded relatively inline with major peers...

<img alt="" src="http://media.ycharts.com/charts/fa8147fdfab2db2d4b097acccc3a24e6.png" />

However, now Coach is trading on the low end. I don't think this is justified. The purse maker is trading at a 12.4 times forward P/E, and analysts expect five-year EPS to grow at an annualized 11.2%. I think now would be a great buying opportunity for Coach, while both Fossil and Tiffany should both be big benefactors on a return in consumer discretionary spending; but I'd hold off on Fossil given the recent run up. 

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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Coach and Fossil. The Motley Fool owns shares of Coach and Fossil. 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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