ModernGraham Valuation: Coach Inc. (COH)

moneyCompany Profile (obtained from Google Finance): Coach, Inc. (Coach) is a marketer of accessories and gifts for women and men. The Company offers a range of modern, fashionable handbags and accessories. Its product offerings include women’s and men’s bags, accessories, footwear, wearables, jewelry, travel bags, sunwear, watches and fragrance. The Company operates in two segments: North America, which includes sales to North American consumers through Company-operated stores, including the Internet, and sales to wholesale customers and distributors and International, which includes sales to consumers through Company-operated stores in Japan and mainland China, including the Internet, Hong Kong, Macau, Singapore, Taiwan, Malaysia and Korea and sales to wholesale customers and distributors in 25 countries.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  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 – PASS
  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 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg 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 = 5/5

  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 – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $92.02
MG Opinion Undervalued
Value Based on 3% Growth $48.24
Value Based on 0% Growth $28.28
Market Implied Growth Rate 4.23%
Net Current Asset Value (NCAV) $2.72
PEmg 16.95
Current Ratio 2.65
PB Ratio 6.65

Balance Sheet – 9/30/2013 

Current Assets $1,872,100,000
Current Liabilities $707,400,000
Total Debt $500,000
Total Assets $3,487,400,000
Intangible Assets $372,900,000
Total Liabilities $1,108,800,000
Outstanding Shares 280,420,000

Earnings Per Share

2014 (estimate) $3.34
2013 $3.61
2012 $3.53
2011 $2.92
2010 $2.33
2009 $1.91
2008 $2.17
2007 $1.69
2006 $1.27
2005 $1.00
2004 $0.68
2003 $1.25

Earnings Per Share – ModernGraham 

2014 (estimate) $3.33
2013 $3.17
2012 $2.82
2011 $2.38
2010 $2.03
2009 $1.79


Coach Inc. is a very strong company, with healthy financials and a very consistent and promising level of growth in earnings.  The company is not suitable for the Defensive Investor, having failed the PB ratio and Dividend Record requirements.  The company passes all of the requirements of the Enterprising Investor, and that investor type should feel comfortable proceeding with further research, beginning with a review of some Defensive Investor companies.  From a valuation standpoint, the company has grown its EPSmg (normalized earnings) from $1.79 in 2009 to an estimated $3.33 for 2014.  The market implies a growth rate of 4.23%, a rate which is easily supported by the earnings history.  As a result, the company appears to be undervalued at the current time and there may be an opportunity for profit.

What do you think?  Do you agree that Coach Inc. is undervalued?  What would be your assessment?  Is the company suitable for Defensive Investors or Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author held a long position in Coach Inc. (COH) at the time of publication and had no intention of liquidating that position within the next 72 hours. Photo Credit:  Andrew Magill

2 thoughts on “ModernGraham Valuation: Coach Inc. (COH)

  1. Charles Scouten says:

    Financials look good for Coach, but fashion is fickle. I do not understand what moves fashion What’s worse, even after some study, I still have a poor understanding of the risks in their supply chain. For these reasons I will leave fat profits in Coach to others. I buy businesses, not financial statements.

    1. Charles, Thanks for giving your thoughts! These are the types of considerations that must be discussed after the quantitative analysis is complete.

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