Coach Inc.
Solomon's Select, by Mark Robertson, Managing Partner October 1st, 2008
Coach ranks among the highest quality of all companies. If purses continue to be sold, we like Coach's chances.
We featured Coach (COH) in the June 2006 Solomon Select column at a price of $29. We watched with enthusiasm and certain genius as the price proceeded to advance to $54 during 2007. Alas, our enthusiasm waned and our pride was replaced with humility again as the stock price has sagged back into the low-20s.
So we have to ask ourselves, “Has the long-term perspective changed? Will a vast community of ladies collectively decide that they’ve bought their last purse?”
We don’t own a crystal ball as MANIFEST but we don’t think it’s wild-eyed speculation to assume that purses (and accessories) will continue to be sold. I personally witnessed the standing-room-only purchase lines at a Coach outlet a few months ago and my friend, Ann Cuneaz, of NAIC/BetterInvesting confirmed, a similar experience during a recent visit to Seattle.
Coach: Visual Analysis. The historical sales and earnings trends have been quite strong for Coach. Even an emphasis on the last two actual and next two forecast (as shown here) suggests considerable potential. The sales growth forecast is 14% versus a 5-year historical sales growth rate of 24.5%. The analyst consensus estimate for EPS growth is 17.1%
Growth
The 5-year historical sales growth is 24.5%. Morningstar has recently become less enthusiastic, reducing sales growth expectations to “mid-single digits.” S&P is much more favorable with 13% growth forecasted for 2009 and advances in international markets contributing to maintain the significant historical sales growth levels. Value Line has a 3-5 year sales growth forecast of 22%. The opinions are wide and varied — we’ll use 15.4% and cheer for Value Line.
Coach: Chronicle. Consistent quality is evident on this time series profile of quality and PAR for Coach. The price increase (after June 2006) and the subsequent swoon also. A recent price drop to the low $20s returns PAR to 25%.
Profitability
The 5-year average net margin has been 22.7% reaching an all-time high of 24.4% during 2007. The average net margin for Retail Special is 11.0% and we’ve used 17.6% for the COH margin forecast. (We would argue that these are conservative profitability expectations.) Based on the sales growth and net margin forecast, the 5-year EPS estimate is $3.66.
Valuation
The industry average projected P/E is 17×. Based on the fair value estimates and P/E forecasts by S&P and historical trends, a P/E of 20x is feasible. We’ve used 19.0×.
Expected Returns, Quality & Conclusions
Based on a price at the time of the study of $22.54, the projected annual return was approximately 25%. Coach ranks among the highest quality of all companies. If purses continue to be sold, we like Coach’s chances.
Mark Robertson
Mark Robertson is founder and managing partner of Manifest Investing, a source for research and portfolio management focusing on strategic long term investors.