Apparel Stocks

Michael Kors Holdings Analysis – June 2015 Update $KORS

MK_COOL_GRAY_7CMichael Kors Holdings (KORS) is currently trading very near its 52 week low, a factor that immediately attracts some investors. In addition, multiple analysts have been raving about the value opportunity based on qualitative factors. For example, Seeking Alpha contributor Insider Monkey recently wrote about a large number of share purchases by insiders, Michael Thomas believes the company’s share price may turn around if management redeems themselves in investors eyes, and Josh Arnold explains that the company just seems “too cheap to ignore.” These articles all explore great factors to consider in the final stages of an investment decision, but first one must use quantitative metrics to determine the company’s intrinsic value.

Benjamin Graham, the father of value investing, taught that the most important aspect to consider is whether the company is trading at a discount relative to its intrinsic value. It is through a thorough fundamental analysis that the investor is able to make a determination about a potential investment’s merits.

The model is inspired by the teachings of Benjamin Graham and considers numerous metrics intended to help the investor reduce risk levels. The first part of the analysis is to determine whether the company is suitable for the very conservative Defensive Investor or the less conservative Enterprising Investor, who is willing to spend a greater amount of time conducting further research.

In addition, Graham strongly suggested that investors avoid speculation in order to remove the subjective elements of emotion. This is best achieved by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another. By using the ModernGraham method, one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.

KORS Chart

KORS data by YCharts

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Defensive Investor – Must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise – Market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – Current ratio greater than 2 – PASS
  3. Earnings Stability – Positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – Has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – Earnings per share has increased by at least 1/3rd over the last 10 years, using 3-year averages at the beginning and end of the period – FAIL
  6. Moderate PEmg (price over normalized earnings) ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – Must pass at least 4 of the following 5 tests or be suitable for a Defensive Investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – Current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt-to-Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – Positive earnings per share for at least 5 years – PASS
  4. Dividend Record – Currently pays a dividend – FAIL
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data

Recent Price $45.37
MG Value $108.19
MG Opinion Undervalued
Value Based on 3% Growth $40.75
Value Based on 0% Growth $23.89
Market Implied Growth Rate 3.82%
Net Current Asset Value (NCAV) $7.71
PEmg 16.15
Current Ratio 6.11
PB Ratio 4.11

Balance Sheet – March 2015

Current Assets $2,017,000,000
Current Liabilities $330,000,000
Total Debt $0
Total Assets $2,692,000,000
Intangible Assets $76,000,000
Total Liabilities $451,000,000
Outstanding Shares 203,200,000

Earnings Per Share

2015 $4.28
2014 $3.22
2013 $1.97
2012 $0.78
2011 $0.40
2010 $0.22
2009 $0.00
2008 $0.00
2007 $0.00
2006 $0.00
2005 $0.00

Earnings Per Share – ModernGraham

2015 $2.81
2014 $1.82
2013 $0.97
2012 $0.41
2011 $0.19
2010 $0.07

Dividend History

Michael Kors does not pay a dividend.

Conclusion

Michael Kors is not suitable for Defensive Investors but it does pass the initial requirements of the Enterprising Investor. The Defensive Investor is concerned with the short operating history, lack of dividends, and the high PB ratio, while the Enterprising Investor’s only concern is the lack of dividends. As a result, all Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, it has grown its EPSmg (normalized earnings) from $0.19 in 2011 to $2.81 for 2015. This is a fairly strong level of demonstrated growth, and outpaces the market’s implied estimate for annual earnings growth of only 3.82% over the next 7-10 years.

In recent years, the company’s actual growth in EPSmg has averaged considerably more than the market’s estimate annually, and while the ModernGraham valuation model reduces the actual growth to a more conservative figure when making an estimate, the model still returns an estimate of intrinsic value well above the current price, indicating that Michael Kors is significantly undervalued at the present time.

Disclaimer:  The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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One thought on “Michael Kors Holdings Analysis – June 2015 Update $KORS

  1. Regarding “Insider Monkey’s” comments on insider buying, I strongly suggest you go read the actual S-4 filing. I think you might find that these appear to be option grants issued on June 15, 2015 at 47.10 that will vest 25% per year, beginning in 2016.

    The “inside buyers” would appear to have no risk, and are not using their own money at this time–which is probably why KORS stock has continued to decline from that price level–and now closing at a new 52 week low.

    However, I do agree that KORS stock certainly “appears” cheap to just about every value metric; in addition, I have talked to a number of KORS store managers (as well as FOSL store managers–they make the KORS watches); from them I get a sense that the AAPL watch impact is way overblown, and that business generally at KORS is OK, including the new early release fall handbag collection. It is always possible that KORS management was just too cautiously negative in the recent conference call.

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