Stock Analysis of Coach (COH)

Whether or not to purchase Coach stock has been a popular topic among value investors as of late because of its recent price action. Many of our clients have requested a stock analysis as they, along with others, struggle with what to do about this storied brand.

2014 has not been kind to Coach stock (symbol: COH). In fact, over the last two and a half years, Coach has dropped 57% from its high of $79.70 all the way down to $34.34 at the time of this writing. Since the beginning of this year alone, the stock has fallen almost 40%.


Coach Stock Analysis Chart

The price of COH has dropped hard and fast–providing a potential opportunity for value investors


Coach: Figuring out Their “Story”

Coach is a high-end fashion brand that derives most of its revenue from women’s handbags. It’s been around since 1941, and has been one of the main players and drivers of the handbag industry ever since. It’s been an extremely profitable company with a well-respected brand, wonderful financials and an outstanding product.

Those metrics have been put to the test recently. A stock analysis of Coach shows they’re in a situation where Wall Street is beating them down. The stock is being frantically sold as of late, and each time more news comes out, it takes another beating. Warren Buffett has famously said that good investors should “buy fear”. Is this a case where the fear should be bought, or is it warranted with further room to go? How much lower can it go, and is now the time to get in?


The Bull Case for Coach

There are many potential positives that make up the buy argument for this stock analysis.

The growth story is still a factor. Coach is transitioning into a full lifestyle brand rather than solely accessories (handbags and women’s accessories). This means they are successfully expanding into additional products such as clothing, shoes, etc. This opens them up to enormous profit potential going forward. Coach has also been moving into the men’s market, which opens them up to another 50% of the population. This is a longer-term objective that is a small portion of revenue now, but they are seeing some great growth in this segment, and they expect it to be a major revenue producer in the coming years.

Internationally they are performing well. They’re seeing fantastic growth in China (25% growth last year) and Japan, and have barely touched Europe—which is another source of growth for them in the future. Their new CEO—Victor Luis—is the former head of international operations, who’s hiring proves their focus is centered on international growth for the future of the company.

One of the main arguments for buying this stock is its financial position. The balance sheet, margins and ratios are fantastic. Despite the more recent numbers, Coach is still an extremely profitable company with a Return on Equity (ROE) of 32%, which ranks among the highest in the entire market. They are still cash-flow positive at $2.85/share, have virtually no debt, and are holding on to almost $800 million in cash and marketable securities.

They have also been paying uninterrupted dividends since 2009, growing them at a good rate. The dividend yield at the current price is high at almost 4%, and the company has indicated they plan on keeping the dividend in place (their strong financials support that claim). Additionally, management has been buying back stock at an average price around $50, putting money back into the shareholders pockets. The Coach board of directors has approved an additional $835 million for the purposes of continued stock repurchases, which lowers the amount of shares outstanding. This is good for investors as each share becomes more valuable.

COH Dividend Yield

COH has grown their dividend exponentially and currently have a 4% yield, making it one of the higher yields on a major stock

Finally, if the price continues to drop, takeover talk will amplify as a company with this strong of a brand, no debt and a high book value will become a very attractive candidate in this current market of a large number of mergers and acquisitions. A company with a brand and competitive advantage such as Coach can only get so low before competitors or stronger companies want to buy them out. In the case of a buy-out, Coach investors will probably be generously rewarded.


The Bear Case

To perform a full stock analysis and figure out its “story”, we must also take a look at the negatives, and some of the reasons the value of the stock has dropped.

In the case of Coach, it’s fairly easy to see why. Coach and its investors are used to seeing huge margins, returns, and growth. However, this has clearly not been the case in the last year. Sales have declined in comparable stores by significant amounts. The company just recently announced they are closing 80 stores across the country to stop some of the bleeding, and they have also projected revenue declines of low double-digits for the fiscal year of 2015.

COH Tale of Two Regions

Coach relies on North America for 70% of its revenue

North America, which accounts for 70% of all revenue, is in a freefall for Coach as newer brands like Michael Kors and Kate Spade are cutting in significantly on their market share. This hasn’t been good news for current investors of Coach.

Coach is a tale of two regions: international and North America—and North America dominates that split. Until international becomes a bigger piece of the pie, the new competitors in North America may continue to eat into Coach’s profits.

The Coach brand has taken a punch, plain and simple. It’s not easy, especially in the fickle fashion industry, to pick that right back up without further decline. That will take some time for them to recover, if they do. As CEO Victor Luis has stated, “we’re on a multi-year journey.”

The risk with this stock is that Coach could potentially not recover its once dominant edge to the emerging, “younger” brands coming in. The main question is, will the Coach brand re-establish its once powerful image after being taken down a notch from its competitors?


Coach Stock Analysis: Valuation

Now that we have stated both the bull and the bear cases, let’s take a look at the valuation of the stock. It’s important to remember that no matter what analysts, Wall Street, or others are saying about the stock, the numbers need to make sense for you to buy. It’s not enough that the stock has dropped a lot or that many people might be saying it is or isn’t cheap. Stocks are true businesses with real numbers and real cash and other assets behind them. They can be valued—and you should only buy them when the value makes sense.

The current P/E is 10.34—the last time it reached this level was in the depths of the 2008 recession where it dropped below a P/E of 6. For a company in such a strong financial position, this is a very cheap valuation you won’t often see. The P/E as of late has ranged between 13 and 25 so hovering around 10 is rare territory.

COH PE Comparisons

A comparison of competitors PE ratios shows COH is currently on the low end

Looking at growth, analysts are projecting a 3% rate over the next 5 years. This is compared with the historical rate of about 15% over the last 10 years. We are long-term investors and focus on the 10-year horizon. If you are a believer in the Coach brand, its competitive advantage, the management team and its future, then you believe the company will eventually turn things around in the future—even if it’s not in the next year or two. It’s your decision as to what growth rate you project based on your own research. For the purposes of this article, I’ll project a 9% growth over the next 10 years, which factors in the long-term moat of the brand, as well as the analyst’s modest projections.

With a trailing earnings per share of $3.32, using our projections, we arrive at a fair value price for Coach at $35. Within our valuation model, this means that we would expect to make 15% per year, compounded, assuming our projections are accurate.

COH EPS Projection

This projection accounts for decreased EPS in the next two years to arrive at a 9% compounded rate of return over 10 years

However, projections are hardly ever accurate. This is why we use a margin of safety within investments. A margin of safety means that you can get a lot about your estimates and research wrong, and still pay a great price to get a great return on your stocks.

With a fair value of $35, and a current price of $34, this doesn’t give too much of a margin of safety on Coach. It tells us that we’ll likely still get a good return if things do go right, but in case they don’t we would not have that protection in place. It tells us Coach is fairly valued if we hope to earn 15% on our money over the next 10 years—but not necessarily on sale.


What Next in the Stock Analysis?

This is when experience and discipline come in. You need to ask yourself some questions and do the research involved if you think Coach might be a good opportunity. How realistic is that 9% projected growth rate? Do you trust the Coach management team to deliver on their growth opportunities? Are you willing to take a little bit more risk considering the strong financial position, dividend yield and looming takeover possibilities? Do you want to value the stock based on an expected return on your money of 15%, or is 10% acceptable for you?

The most important question is: Does the current market price truly reflect the value of the stock, or is the market emotionally selling Coach out of fear? Price does not always equal value.

Purchasing a stock “on sale” isn’t about being smarter than anyone else—it’s about remaining unemotional when everybody else is losing their heads. And understanding why the stock is dropping.

If you’re looking for a quick, short-term gain—Coach probably isn’t your stock. There’s no doubt they face difficulties moving forward and are currently in turnaround mode. However, if you want a stock for the next 10 years, you owe it to yourself to consider if Coach is a good value right now. Just because they might have a rough year ahead doesn’t mean the stock can’t grow. That news has been factored in and is the reason the stock is so low today. The risk of trying to wait it out to get lower could mean you miss the opportunity now.


Is it Time to Buy Yet?

Buy Sell or Hold Coach stock

It’s ultimately your decision if you want COH to be a part of your portfolio

Coach has been knocked down hard and Wall Street is not hot on it. Remember, the best money is usually made when everybody else is selling. Sometimes everyone is selling for the right reasons. Other times they are selling for bad, emotional reasons. We can make our money by doing a stock analysis and determining what kind of selling is going on here. Good investing needs to be about the long-term—it’s the only way to ensure your future.

I believe Coach may have a little bit more room to drop, but that it won’t drop much below $30. I don’t think competitors or other holding companies will allow the market capitalization to fall much below $8 billion (it’s currently below $10 billion). I don’t think the brand is done—it’s just too strong of a brand and the financials on the company are fantastic. I have faith in their management, and their long-term outlook. By doing a full Coach stock analysis, I have confidence that I’ll be able to eventually get a good return on my money by employing the right techniques.

But don’t just follow me here. If you aren’t talking with me and keeping up with my investments, you don’t know what price I’m buying at, what I’m doing to drive down my basis, and what’s making me sell. Simply following me—or anybody else—on the buy side, then not knowing what actions they take next, is a sure-fire way to lose some money.


Be Financially Independent

It’s ultimately your choice in what you choose to do with Coach. By now there should be no doubt that this way of investing and thinking allows you to do it confidently and without stress. If you make an investment mistake, you admit it quickly (that’s what the best investors do), and you shouldn’t lose much if done right. If your stock analysis is correct, you will make a fantastic return.

It’s all about trusting your research and having discipline. This way of investing absolutely can be done by anyone. It’s been done by some of the richest and most successful people in the world. And it can be done by you, repeatedly until you reach your goals.

Can Coach go lower? Absolutely. Are you worried about that if you’re a long-term investor? No way—well in our opinion, you shouldn’t be. Not if you’ve done your own stock analysis and feel comfortable with the price. As long as the “story” of the company remains the same, and no significant new development in the company changes the long-term outlook, then you would want to continue purchasing if the stock went lower. In fact, you should get excited as the stock goes lower because you’ll get to buy more stock that you wanted before—at a cheaper price.

As time goes on in any stock, you’ll continue to lower your basis (your effective purchase price) through additional stockpiling, options on the stock, dividends, and company buybacks. You’ll have so many weapons in your investment arsenal that you can get your basis down to a level where it’s nearly impossible not to make a great return.

This is playing with the odds extremely on your side. This is when investing gets fun. And this is investing with peace, confidence and discipline. After all, that’s what working with us is all about.

Live Your Dreams

**As is always the case, these are insights only. None of the above statements should be construed as advice of any kind. I recommend that all investors perform their own research and stock analysis before making any type of investment decisions.

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Kevin Tudor is the VP of Investment Training for Margin of Safety Investing, LLC. After a significant amount of time in the financial services industry, Kevin moved on to investment research and analysis to bring his expertise to the individual investor. He now resides in Scottsdale, Arizona where he conducts online webinars, writes financial newsletters, and provides various methods of investment training to show others the key strategies to successful investing.

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