Retail Stocks

Coach Inc Valuation – February 2016 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 – November 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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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is a free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of COH

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 $10,326,449,992 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 3.27 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 1.88% Fail
6. Moderate PEmg Ratio PEmg < 20 16.65 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 4.02 Fail
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 3.27 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.55 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 February 2016

EPSmg $2.23
MG Growth Estimate -3.13%
MG Value $4.98
Opinion Overvalued
MG Value based on 3% Growth $32.35
MG Value based on 0% Growth $18.97
Market Implied Growth Rate 4.07%
Current Price $37.15
% of Intrinsic Value 745.94%

Coach Inc qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the short dividend record, insufficient earnings growth over the last ten years, and the high PB ratio.  The Enterprising Investor is only initially concerned by the lack of earnings growth over the last five years.  As a result, 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 $2.23 for 2015.  This level of demonstrated earnings growth does not support the market’s implied estimate of 4.07% 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.

Stage 3: Information for Further Research

COH charts February 2016

Net Current Asset Value (NCAV) $0.96
Graham Number $18.87
PEmg 16.65
Current Ratio 3.27
PB Ratio 4.02
Dividend Yield 3.64%
Number of Consecutive Years of Dividend Growth 1

 

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Most Recent Balance Sheet Figures

Balance Sheet Information Dec2015
Total Current Assets $2,301,600,000
Total Current Liabilities $704,000,000
Long-Term Debt $872,000,000
Total Assets $4,603,700,000
Intangible Assets $0
Total Liabilities $2,036,400,000
Shares Outstanding (Diluted Average) 277,500,000

Earnings Per Share History

Next Fiscal Year Estimate $1.71
Jun2015 $1.45
Jun2014 $2.79
Jun2013 $3.61
Jun2012 $3.53
Jun2011 $2.92
Jun2010 $2.33
Jun2009 $1.91
Jun2008 $2.17
Jun2007 $1.76
Jun2006 $1.27
Jun2005 $0.86
Jun2004 $0.57
Jun2003 $0.33
Jun2002 $0.24
Jun2001 $0.19
Jun2000 $0.14
Jun1999 $0.06
Jun1998 $0.07

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $2.23
Jun2015 $2.61
Jun2014 $3.14
Jun2013 $3.17
Jun2012 $2.82
Jun2011 $2.38
Jun2010 $2.04
Jun2009 $1.79
Jun2008 $1.60
Jun2007 $1.20
Jun2006 $0.83
Jun2005 $0.55
Jun2004 $0.36
Jun2003 $0.23
Jun2002 $0.17
Jun2001 $0.12
Jun2000 $0.08

Recommended Reading:

Other ModernGraham posts about the company

Coach Inc. Valuation – October 2015 Update $COH
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. Quarterly Valuation – April 2015 $COH

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Disclaimer:

The author held a long position in Coach Inc 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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