Retail Stocks

Coach Inc. Valuation – October 2015 Update $COH

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – October 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Coach Inc. (COH) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Coach, Inc. (Coach) is a design house of modern luxury accessories and lifestyle collections. The Company operates through three segments: North America, which includes sales to North American consumers through Coach-branded stores (including the Internet) and sales to wholesale customers; International segment, which includes sales to consumers through Coach-branded stores (including the Internet) and concession shop-in-shops in Japan and mainland China, Coach-operated stores and concession shop-in-shops in Hong Kong, Macau, Singapore, Taiwan, Malaysia, South Korea, the United Kingdom, France, Ireland, Spain, Portugal, Germany, Italy, Belgium and the Netherlands, as well as sales to wholesale customers and distributors in approximately 45 countries, and Other segment, which consists of sales and expenses generated by the Coach brand in other ancillary channels, including licensing and disposition. Its product offerings include watches, footwear, scarves and jewelry.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of COH – October 2015

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $8,080,755,158 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 3.00 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 1.37% Fail
6. Moderate PEmg Ratio PEmg < 20 13.11 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.26 Pass
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 3.00 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.53 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Fail

Stage 2: Determination of Intrinsic Value

COH value Chart October 2015

EPSmg $2.22
MG Growth Estimate -3.19%
MG Value $4.72
Opinion Overvalued
MG Value based on 3% Growth $32.21
MG Value based on 0% Growth $18.88
Market Implied Growth Rate 2.31%
Current Price $29.13
% of Intrinsic Value 616.94%

Coach Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned by the short dividend history and the insufficient earnings growth over the last ten years, while the Enterprising Investor is only concerned by the lack of earnings growth over the last five years.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) decline from $2.82 in 2012 to an estimated $2.22 for 2016.  This level of demonstrated earnings growth does not support the market’s implied estimate of 2.31% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Coach Inc. (COH)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

COH Charts October 2015

Net Current Asset Value (NCAV) $1.18
Graham Number $18.44
PEmg 13.11
Current Ratio 3.00
PB Ratio 3.26
Dividend Yield 4.64%
Number of Consecutive Years of Dividend Growth 1

 

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Most Recent Balance Sheet Figures

Total Current Assets $2,506,500,000
Total Current Liabilities $834,700,000
Long-Term Debt $879,100,000
Total Assets $4,666,900,000
Intangible Assets $794,100,000
Total Liabilities $2,177,000,000
Shares Outstanding (Diluted Average) 278,400,000

Earnings Per Share History

Next Fiscal Year Estimate $1.68
Jun15 $1.45
Jun14 $2.79
Jun13 $3.61
Jun12 $3.53
Jun11 $2.92
Jun10 $2.33
Jun09 $1.91
Jun08 $2.17
Jun07 $1.76
Jun06 $1.27
Jun05 $0.86
Jun04 $0.57
Jun03 $0.33
Jun02 $0.24
Jun01 $0.19
Jun00 $0.14
Jun99 $0.06
Jun98 $0.07

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $2.22
Jun15 $2.61
Jun14 $3.14
Jun13 $3.17
Jun12 $2.82
Jun11 $2.38
Jun10 $2.04
Jun09 $1.79
Jun08 $1.60
Jun07 $1.20
Jun06 $0.83
Jun05 $0.55
Jun04 $0.36
Jun03 $0.23
Jun02 $0.17
Jun01 $0.12
Jun00 $0.08

Recommended Reading:

Other ModernGraham posts about the company

The Best Companies of the Retail Industry – August 2015
The 20 Best Stocks For Value Investors This Week – 7/25/15
Coach Inc. Analysis – July 2015 Update $COH
Coach Inc. Analysis – July 2015 Update $COH
Coach Inc. Quarterly Valuation – April 2015 $COH

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Disclaimer:

The author held a long position in Coach Inc. (COH) but did not hold a position in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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