Why don't investors love New York-based luxury-goods purveyor
Women love the brand and the stores. There are more than 500
in North America and another 300 or more stores in Asia. And the
stock has richly rewarded investors who've embraced it. Though
down slightly in the past twelve months, Coach's stock has
soundly beaten the S&P 500 over the past five years. Here's a
comparison of the total return (including dividends) of Coach's
shares versus the total return of the S&P 500.
COH Total Return Price
The company earned $1.04 billion on $4.76 billion in sales in
the year ended July 31. And before that Coach delivered steady
earnings right through the recent recession. Even though you
would think expensive handbag purchases would dry up during a big
recession, Coach didn't lose a dime in 2008 or 2009.
EPS Diluted Quarterly
Yet, despite the far-above-average results, investors have
never rewarded Coach with a stratospheric
. Generally, Coach trundles along with a PE similar to that of
that Ralph Lauren (
) and significantly lower than those of Nike (
) and Starbucks (
COH PE Ratio TTM
This year Coach has struggled more than usual to get respect
from shareholders. While Ralph Lauren's
has zoomed up to 22, Coach's PE has slumped to 16, which is
slightly below average for an S&P 500 stock.
COH PE Ratio TTM
Why? It's possible that Coach is losing some investors to a
small fashion designer and retailer called Michael Kors (
), which went public late last year. Kors has half as many stores
as Coach does and just one quarter of Coach's sales. And while
Coach focuses on accessories, Kors is more of a high-end
clothier. Yet, despite their differences, there's no arguing
which stock has fared better since Kors' intial public
Kors is trading at 38 times the $1.45 a share that analysts
predict it will earn in the year ending March 2013. That's the
that Coach's management has never come close to enjoying-despite
an extraordinary record of being disciplined and treating
Coach has been an aggressive purchaser of its shares these
past five years-a sign that management regards the company's
stock as a superior investment to those they're finding in the
retailing world. The company has reduced its total shares out by
COH Shares Outstanding
Also, since 2009, Coach management has been more generous than
Ralph Lauren's in regards to dividends. The company's current
is greater than 2 percent.
COH Dividend Yield
Remarkably, Coach's managers have succeeded at the dividend
payments and share purchases while maintaining a lid on debt.
Coach's leverage is significantly lower than that of Ralph
Lauren, Nike and Tiffany (
COH Debt to Equity Ratio
So if you're a long-term, value-minded investor, there's an
interesting play here in Coach stock.
Coach is trading at just 15 times the $3.85 a share analysts
are projecting the company will earn this fiscal year (ending
July 2013). You can purchase the shares and collect the 2.1
percent dividend that Coach pays. You can assume that management
will continue to repurchase shares and lift dividends until it
discovers better use for the company's ample cash flow. Those
dividend payments and share repurchases should help Coach
continue to beat the S&P 500, even if its PE ratio stays
right where it is.
And as a kicker, you can wager that investors do what they've
done in the past, which is to notice that Coach's PE ratio has
fallen behind that of Ralph Lauren. At some point-probably around
the same time they realize they've bid Kors up too high-they will
see that Coach has become too good a bargain to ignore.
If they bid the stock back up to 20 or 22 times earnings, you
can sell and walk away with a nifty 30% to 40% gain.
Stephane Fitch is a contributing editor at YCharts, which
includes the just-released
YCharts Pro Platinum
for professional investors.