Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Most Undervalued Companies for the Defensive Investor – July 2015.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a stock analysis showing a specific look at how Coach Inc. (COH)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance): Coach, Inc. is a design house of modern luxury accessories and lifestyle collections. The Company offers premium lifestyle accessories to a loyal and engaged customer base and provides consumers with products that use a broad range of leathers, fabrics and materials. The Companyâ€™s operates in two reportable segments: North America, which includes sales to North American consumers through Coach-operated stores and sales to wholesale customers, and International, which includes sales to consumers through Coach-operated stores and concession shop-in-shops and sales to wholesale customers and distributors in approximately 35 countries. The Companyâ€™s product offerings include modern luxury accessories and lifestyle collections, including women’s and men’s bags, womenâ€™s and menâ€™s small leather goods, business cases, footwear, wearables including outerwear, watches, weekend and travel accessories, scarves, sunwear, fragrance, jewelry, travel bags and other lifestyle products
To read the rest of this valuation, you must be logged in as a premium member. If you are not a premium member, please consider becoming one.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â PASS
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â FAIL
- 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 -Â PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â PASS
Enterprising Investor – must pass at least 4Â of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 -Â PASS
- Earnings Stability – positive earnings per share for at least 5 years -Â PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$38.78|
|Value Based on 0% Growth||$22.73|
|Market Implied Growth Rate||1.58%|
|Net Current Asset Value (NCAV)||$3.34|
Balance Sheet -Â MarchÂ 2015
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
CoachÂ Inc.Â qualifies for the Enterprising Investor andÂ the more conservative Defensive Investor. Â The Defensive Investor is only concerned with the short dividend history. Â The Enterprising Investor has no initial concerns. Â As a result, all value investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the evaluation. Â As for a valuation,Â the company appears to be fairlyÂ valued afterÂ growingÂ itsÂ EPSmg (normalized earnings) from $2.38 in 2011 to an estimated $2.67 for 2015. Â This level of demonstrated earnings growth supportsÂ the market’s implied estimate ofÂ 1.58% annual earnings growth over the next 7-10 years.Â As a result, the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative toÂ the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Coach Inc. (COH)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author held a long position in Coach Inc. (COH) but did not hold aÂ position in any other company mentioned in this articleÂ at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.