Fossil Worth $135 Again?

By Chad Henage - February 6, 2012 | Tickers: COH, FOSL | 0 Comments

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Fossil (NASDAQ: FOSL) doesn't get enough credit in the market. The company has been a fast growth machine for the last few years, and has positive momentum going forward. There are a lot of reasons to like the stock. So why even after a recent 14% increase do I think its still undervalued? Read on to find out.

Fossil makes accessories. Don't get me wrong, the company makes a lot of things -- tops, bottoms, jeans, hats, handbags, etc. However, when you get right down to it, Fossil is known for its line of watches, including such iconic names as Fossil, DKNY, Michael Kors, Marc by Marc Jacobs, and others. The company has leveraged the popularity of these brands into an impressive earnings track record. If you look at Fossil's 25%+ earnings growth in the last several years it stacks up well against other growth names. Most companies in the market that have a past growth rate of 25% command premium valuations. Even after its most recent run Fossil still sells at a discount to its future growth rate. Let me show you what I mean.

Fossil sells for about $99.51 as of this writing, and is expected to earn about $5.46 for full year 2012. The interesting thing is it seems analysts still can't gauge Fossil's growth rate correctly. The company has beaten earnings estimates by an average of over 12% in the last four quarters. The crazy part is even with this earnings outperformance, the 2012 full year estimates have come down! The company has been buying back its shares on a regular basis, which adds to future earnings per share. It's not a stretch to think that Fossil could continue to beat estimates by 12% going forward. If expectations are for $5.46 earnings, and they beat full year estimates by 12%, you get earnings of $6.11. At $6.11 a share in earnings and forward growth expected at nearly 20%, this is a $122 stock. With 25% past growth, 20% future growth, and consistent earnings beats, the stock should sell at a premium. Selling at $135 would give the stock a PEG of 1.25, certainly within reason for a growth name in today's market.

To see if this is wishful thinking, let's look at one of Fossil's competitors Coach (NYSE: COH). The two companies share a lot of positive characteristics. Both companies have a history of beating earnings. Both companies have good expected growth rates with 16.12% for Coach. There are three advantages that Fossil has over Coach. I'll lay the comparison out in a chart so you can see side by side.

So Fossil has the lower projected PEG, higher future growth, and beats earnings by a higher margin. If Coach is valued at a PEG of 1.28 this means if Fossil sold at the same PEG the stock would be at $139. It seems not only is a higher price not a fantasy, but this could be a reality sooner than the market expects.

I've already voted with my dollars as I own Fossil myself. I've also already weighed in with my CAPSCall of a thumbs-up. So check into Fossil yourself, and see if this growth stock deserves a spot in your portfolio.

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