Studying Strayer (STRA)

[AF addendum: Strayer Education , discussed below, is also the subject of a short article by Cy Lynch, BI’s growth stock guru, and his completed SSG both appear in the January 2010 on-line issue of Better Investing Magazine.]

– One purpose of this post is to demonstrate the powerful effect of projecting future growth from the last quarter of reported data vs. the last fiscal year.

** With that single change, my Forecast High EPS was some 16% greater than the Ken Kavula/Consensus SSG Forecast High EPS for Strayer Education (STRA).  Strayer was the Online Stock Study for October, we both used the same EPS estimate, and the only difference was that I projected growth from the end of the last Q while Ken & the Consensus projected from the end of the last FY. 

– Another purpose is to evaluate the different judgments that led Ken & the Consensus to decide that STRA was a SSG Buy while I concluded that it was a SSG Don’t Buy.

Online Stock Study:

– Strayer Education (STRA) was the Online Stock Study for October 2009 at the Better Investing website and was led by Ken Kavula, chairman of the BI Advisory Board and a small company guru. 

– BI members can download the Audio Presentation (54 mins), Presentation Slides, Value Line Reports, and the Completed SSG.

Company Background:

– Strayer Education (STRA) and its subsidiary, Strayer University, are for-profit companies.  At the end of 2008, SU had some 46,000 students at 71 campuses in 15 states (mostly on the SE coast) and a large online student body.

– SU offered the following degrees: Bachelor’s (54%), Master’s (27%) and Associates (11%) and its students were majoring in Business/Economics (61%), Information Systems (16%), and Accounting (12%). 

 – Morningstar reported that enrollment growth has averaged 18% per year for the last 5 years due to additional online students and new campuses.  Strayer currently seeks to add about 6-11 campuses annually.

– Morningstar also reported that Strayer has a lower cost structure than traditional schools, but offers its courses at similar prices.  And, according to Reuters, online courses are priced the same as on-campus offerings with over 32,000 students participating in SU’s online programs.

– Strayer’s revenue comes from three sources according to Wikinvest: about half is paid via federally insured loans, about 20% is paid by companies whose employees attend SU, and the rest is paid directly by students.

– Graduate level tuition at SU costs $2050 per course and undergraduate tuition costs $1515 per course for full-time students and $1590 for part-timers.  A BBA degree requires 180 credit hours and costs (at 3 credits per course) some $95,000.

– In Q 3, which ended 9/30/09, revenues increased 31% due to increased enrollment and a 5% tuition increase that was effective January 1^st. Enrollment increased 22% to 54,317 students with 39,129 taking at least one online class.

Company Financials:

– Value Line gave Strayer an “A” for Financial Strength, reported no debt and $38.6 M in cash as of 6/30/09.

– Morningstar says that Strayer is in “excellent” financial health with no debt and has the highest score for financial responsibility from the US Dept of Education.

  Discussion:

– The following table compares the Consensus & Ken Kavula SSG with two of mine and with Take Stock.  The only difference between my two SSGs is that Armin-1 uses S&P data while Armin-2 uses Hemscott-Morningstar data.  After the table, I discuss issues identified by the comparison.

Strayer Education  (STRA)	Consensus & KenK’s SSG	Armin’s                  SSG-1	Armin’s                SSG-2	Take Stock
Date	10/6/2009	Same	Same	10/3/09
Data	S&P	S&P	Hemscott-Morningstar	Hemscott-Morningstar
Price	$221.10	Same	Same	$211.83
52 week High &        Low Price	$239.99 &      $143.53	Same	Same	Not Included
Last Q of Reported Data	Q2 ending 06/30/09	Same	Same	Q2 ending 06/30/09
Software Used	Online SSG	TK 5	Same	TS Online
Project Growth         From End of	Last FY	Last Q	Last Q	Last FY
Sales Growth	19.00% (Consen.) 18.00% (Ken)	Same	Same	20.00%
EPS Growth	19.00%	Same	Same	18.50%
High PE	35.0 (Ken)	30.0	Same	30.0
High EPS	$13.53	$15.77	$15.74	$13.24
High Price	$473.55                    (4.0% > VL)	$473.10                    ($4.0% > VL)	$499.80                    (9.8% > VL)	$397.20
Value Line Estimated High Price = $335-455 as of 7/31/09
Low PE	25.0 (Ken)	18.7	Same	16.5
Low EPS	$6.61	Same	$6.60	$6.28
Low Price	$165.77	$123.60	$123.40	$156.60 (yield supported low)
Upside/Down	4.52	2.60	2.90	3.36 (imputed)
Total Return	17.91%	17.00%	18.8%	15.10%
SSG Buy Under	Not Included	$210.98	$217.50	$213.97
RV/PRV                        (no outliers)	Not Included	101.5/85.4	95.2/89.5	Not Included
RV/PRV                        (2004 out)	Not Included	106.4/89.5              (2004 out)	101.0/89.6             (2004 out)	Not Included
Quality	Ken = Pass	S&P = A	None	TS = 10 (highest)
PTPM –  5 yr ave	33.94%                  Trend N/A	33.9%                    Trend Down	Same                    Same	33.90%            Trend N/A
ROE – 5 yr ave          End Equity	33.47%                    Trend N/A	33.5%                       Trend Up	Same                     Same	Not Included
ROE – 5 yr ave          Start Equity	N/A	36.7%                        Trend Up	49.1                Trend Down	47.1%                 Trend N/A
Debt to Equity –         5 yr ave	-0-                              Trend Even	Same	Same                       Same	Not Included

(1) CONSENSUS & KEN’S SSG:

Future Sales Growth:

– Ken gave the group 5 choices to estimate STRA’s future Sales growth: 22.00%, its ten year historical growth; 21.00%, its five year historical growth; 22.80%, Value Line’s estimate [??]; 19.00%, Morningstar’s estimate; and Other.

** Value Line makes no long-term Sales estimate and Ken did not explain how he determined that 22.80% was VL’s estimate.

– The Consensus (49%) agreed on 19.00%, Morningstar’s estimate, but Ken decided that 18.00% was better even though it was not offered as a choice.

– Ken has a strange understanding of consensus decision-making!!

Future EPS Growth:

– Ken used the NAIC/BI Preferred Procedure as one estimate of future EPS growth and relied essentially on the software default values: Sales = 18.0%; Pre-Tax Profit Margin = 34.0% (the only change from the 33.9% default); Taxes = 38.5%; and Shares Outstanding = 14.0 M.  His PP result was 19.0% EPS.

** One participant asked why he didn’t use VL’s higher estimate of 14.5 M shares outstanding in the next 3-5 years and Ken said he thought VL’s report on Strayer was too aggressive.

– Ken gave the group 5 choices to estimate future EPS growth: 20.00%, the S&P estimate; 18.60%, STRA’s 10 year historical growth; 24.60%, VL’s estimate; 19.00%, Ken’s PP; and Other.

– The Consensus (47%) agreed on 19.00%, Ken’s PP, and not surprisingly Ken did not disagree this time.

Forecast High PE:

– Ken offered 5 choices: 40.4, the 5 year average High PE; 38.2, the 10 year average; 42.6, the 2 year average; 42.3, the most recent year High PE; and Other.

– Before the vote, Ken said he personally would only use the “Other” choice, but gave no further guidance.  It’s no surprise that the Consensus (76%) chose “Other” and Ken then chose 35.0, but gave no reason.

Forecast Low PE:

– Ken gave participants 5 choices: 25.3, the 5 year average Low PE; 21.1, the 10 year average; 24.2, the 2 year average; 25.1, the most recent year Low PE.

– The Consensus (39%) chose 21.1, the 10 year average, but Ken again disregarded the Consensus and selected 25.0, and again gave no reason.

Final Results:

– Neither the Forecast High nor Low Prices involve judgment with the Onlune SSG:

** The Forecast High Price is simply the product of the Forecast High PE (30.0) multiplied by the Forecast High EPS ($13.53) which totaled $473.10, some 4.00% greater than the high end of VL’s $335-455 High Price estimate.  I guess this VL estimate was not too aggressive for Ken.

** The Online SSG offers no options to decide the Forecast Low Price, unlike our SSG software, and relies soley on the Low PE x Low EPS which totaled $165.77.

 (2) Armin’s SSG:

Projecting Growth From:

– SSG software lets us choose from three options to project future growth (Last FY, Last Q, the historical trend line) and I chose the Last Q in order to demonstrate the powerful effect of this decision.

– Ken chose to use the Online SSG which offers no options and always projects growth from the Last FY.

 Future EPS Growth:

– I deliberately used 19.00% EPS growth, just as Ken did, and got a High EPS of $15.77 compared to his $13.53, a difference of 16.6% with S&P or with Hemscott-Morningstar data which, to me, is no small potatoes.

** The difference would have been 23.3% if I had projected from STRA’s Q3 which ended on 9/30/09, but was reported after the Online Stock Study, and Ken & the Consensus continued to use the Online SSG and project growth from the last FY.

– The seven different analysts I always check for every SSG were estimating long-term EPS at 21.06% with Value Line high at 25.00% and FactSet via Morningstar.com low at 19.50%.  S&P and FactSet CallStreet via CNNMoney.com were both 20.00%, Zacks.com was 20.44%, Reuters was 21.24%, and Reuters Thomson via Yahoo Finance was 21.25%.

– The six analysts at FactSet Call Street via CNN Money.com ranged from a low of 14.00% to a high of 23.0%.  The six analysts at Reuters.com ranged from a low of 18.00% to a high of 24.40%. 

 – Any EPS estimate lower than 14.00% is way too low for me while higher than 24.40 or 25.00% seems way too high.  These low and high estimates are how I determine what’s reasonable and what’s not; see: Determining What’s Reasonable and What’s Not: An Update 

– For how I estimate EPS for all my SSGs, see: Estimating EPS

Forecast High PE:

– I used 30.0 compared to Ken’s 35.0 which I thought was too high.  Toolkit’s Alt-M command usually is the most conservative option.  It eliminates the 5 highest High PEs in the last 10 years, averages the rest, and shows 31.9 with S&P data (31.5 with Hemscott data).  The Online SSG that Ken used does not include the Alt-M command.

Forecast Low PE:

– The major difference between Ken’s SSG and mine is our Forecast Low PEs.  Ken used 25.0 while I used 18.7.  This explains why I got a SSG Don’t Buy while Ken got a SSG Buy.

(3) Pretax Profit Margin (PTPM) and Return on Equity (ROE):

– Ken missed or ignored the 5 year downtrend in PTPM (Presentation Slide 26) which typically signals a red-flag warning sign of potential trouble.

– STRA’s PTPM us better than its Industry Average (33.9% vs 14.4%), but the company’s ROE is worse than its Industry Average (33.5% vs 39.9%).

– Ken compared STRA to three peers: Apollo Group (APOL), ITT Educational (ESI) and DeVry (DV).  He found that STRA was better than the three peers in terms of PTPM, but worse than 2 of the three in terms of ROE.

 – Armin

Contemplating Cognizant (CTSH)

This year, Forbes, Business Week and Fortune magazines all have recognized Cognizant Technology Solutions (CTSH) as an outstanding growth company.  Wikipedia mentions six, noteworthy achievements:

– In 2009, CTSH ranked #7 on Forbes’ 25 Fastest Growing Tech Stocks, #31 on BusinessWeek’s Top 50 Companies, #51 on BusinessWeek’s 100 Hottest Tech Companies, #90 on Fortune’s 100 Fastest Growing Companies (seventh consecutive year on the list), #716 on the Fortune 1000, and was also listed on Forbes’ The Global 2000 (no rankings, Software and Services Industry).  [See footnote 1 for URLs]

COMPANY BACKGROUND:

– CTSH is a global information technology, consulting and outsourcing services company headquartered in New Jersey, with some 50 IT or development centers worldwide, and with most of its 62,000 employees in India.

– According to its latest Annual Report, CTSH is organized into four segments and its 2008 revenue was: 46% from financial services (up 28%), 24% from healthcare services (up 36%), 16% from retail/manufacturing/logistics (up 38%), and 14% from communications and other high tech. About 79% of its total revenue came from customers located in North America.

– Morningstar thinks CTSH’s business model provides a competitive advantage because its management is based in the U.S. and key employees are located on-site.  In 2008, Cognizant had some 565 customers (up from 500 in the prior year and 400 two years ago), with 12,000 of its employees based in North and South America and 2,700 in Europe.

– With either Hemscott or S&P data, sales growth has been spectacular averaging more than 47% per year over the last 10, 5 and 3 years, and EPS growth more than 41% over the same periods. 

** Growth has slowed: last year’s annual Sales were 32% and EPS was 25% (Hemscott) or 26% (S&P).

** Growth in Quarter 3 was up a solid 16% Sales and 18% EPS (so far only reported by S&P) while Q2 growth was up 13% Sales and over 34% EPS (both S&P and Hemscott). 

– Value Line’s latest report concluded that CTSH’s stock price has risen over 115% since the start of 2009, and over 15% since its August report, and now offers limited price appreciation over the next 3-5 years.

COMPANY FINANCIALS:

– VL rated Cognizant an “A” for Financial Strength with no debt and almost $1 B in cash assets.  Morningstar said much the same.

– The one-click Annual Report spreadsheet by Bob Adams gave Cognizant’s 2008 A.R. a 44 out of 100 with 9 Bullish and 6 Bearish results:

** The 9 Bullish or good things included: Sales are increasing and are increasing faster than related costs, no long-term debt, and gross profit margin is growing;

** The 6 Bearish or not-so-goods included: Accounts Receivable are increasing, free cash flow growth is less than sales growth, and shares outstanding are increasing.

DISCUSSION:

The following table compares the SSG by BudS, which I got from Better Investing’s First Cut page, with two of mine and with Take Stock.  The only difference between my two SSGs is that Armin-1 uses Hemscott-Morningstar data from the StockCentral website (like Bud did) while Armin-2 uses S&P data from the BI website.

After the table, I discuss issues identified by the comparison and, once again, ask some questions that I hope you’ll respond to (there are no “right” answers).

Cognizant Technology  (CTSH)	BudS	Armin-1	Armin-2	Take                   Stock
Date	10-7-09	11-13-09	Same	Same
Data	Hemscott-Morningstar	Hemscott-Morningstar	S&P	Hemscott-Morningstar
Price	$39.47	$44.77	Same	Same
52 week High &                 Low Price	$39.61 &         $14.38	$44.77 &         Sane	Same &              Same	Not Included
Last Q of Reported             Data Ending on	Q2 ending         6-30-09	Q2 ending       6-30-09	Q3 ending          9-30-09	Same
Software Used	TK 6	TK 5	Same	TS Online
Project Growth                   From End of	Last Q	Same	Same	Last FY
Sales Growth	15.00%	16.00%	Same	20.00%
EPS Growth	15.00%	16.00%	Same	20.00%
High PE	33.3	25.5                 (from 2008)	25.8                    (from 2008)	30.0
High EPS	$3.23	$3.37	$3.53	$3.59
High Price	$107.60          (65% > VL on 8-21-09)	$85.90            (32% > VL)	$91.10              (40% > VL)	$107.70             (65% > VL)
Value Line Estimated High Price = $40-65 on 8-21-09 and $50-75 on 11-20-09
Low PE	22.4	10.2                  (from 2008)	10.0                  (from 2008)	17.7
Low EPS	$1.15                 (from 2007)	$1.60              (ttm)	$1.68                (ttm)	$1.58
Low Price	$17.30(“other”           option)	$16.30             (low PE x        low EPS)	$16.80              (low PE x             low EPS)	$22.07                  (low PE x                low EPS)
Upside/Down	3.1	1.4	1.7	3.9 imputed
Total Return	22.2%	13.9%	15.3%	22.3%
SSG Buy Under	N/A	$33.70	$35.38	$41.98
RV/PRV (no outs)	70.7/61.6	80.2/69.3	85.3/73.6	Not Included
Quality	Not Included	Same	B+	3.2 unacceptable
PTPM – 5 yr ave	19.8%              trend down	Same               Same	Same                 Same	19.8%                 Same
ROE – 5 yr ave                  End Equity	Not Included	21.5%               trend even	21.0%                trend even	Not Included
ROE – 5 yr ave                  Start Equity	31.1%               trend down	Same              Same	30.5%           trend down	31.2%                  trend down
Debt to Equity –                5 yr ave	-0-                      trend even	Same                Same	Same                   Same	Not Included

Data Differences:

– CTSH ended its last quarter on 9-30-09, but that data is only reported by S&P at this time.  This doesn’t happen often, but is something to be aware of because the choice of SSG data from either Hemscott or S&P can make a noticeable difference whenever we project growth from the last quarter (as I usually do).

– My SSGs were done 5 weeks after Bud’s and, in the interim, CTSH’s price rose 15% to a 52-week high.  I hope he bought it below $40 per share.

Estimating Future EPS Growth:

(A) Bud estimated 15.00% EPS growth and his First Cut write-up explained that he was being conservative “since few companies average over 15% over the long haul.”

** CTSH is, in fact, one of those exceptional companies and its historic EPS growth has averaged much more than 15% over the long haul: 40.5% over the last ten years; 42.5% over the last five; 32.8% over the last three; and 25.0% last year, it’s lowest ever (all with Hemscott data which Bud used).

(B) The seven analysts I always check for every SSG were estimating long-term EPS at an average of 20.03% with Value Line high at 28.50% and FactSet via Morningstar low at 17.30%.  Reuters and FactSet CallStreet via CNNMoney were both 18.00%, Zacks was 18.14%, S&P was 20.00%, and Thomson-Reuters via Yahoo Finance was 20.30%.

** The consensus of the 8 analysts at FactSet CallStreet ranged from a high of 20.0% to a low of 12.0% as did the 9 analysts at Reuters.  And, without Value Line’s estimate of 28.50%, which looks like an outlier to me and which didn’t change in its 11-20 report, the average of the six other analysts dropped to 18.62%. That average less 1 Standard Deviation equals 17.40% and less 2 SDs = 16.18%.

** I projected 16.00% EPS growth based on the analyst average without VL less 2 SDs which, I think, is a conservative approach based on reason.  My 16% estimate is not much different than Bud’s 15%, but at least I’m relying on a rational method, not my gut feelings, and also learned what’s unduly conservative or excessive.  For example, I thought the 12.0% low estimates at FactSet Call Street and at Reuters were too low by comparison.

** For how I estimate EPS for all my SSGs, see: Estimating EPS

 (C) Take Stock used 20.00% EPS which is the highest it will ever estimate for any company no matter how high its actual growth.  In this regard, Take Stock is like Bud as both set (arbitrary) limits on future growth that are unrelated to the company’s actual growth.  

Forecast High and Low PEs:

(A) Bud did not explain, but his 33.3 Forecast High PE seems to be based on eliminating the three years 2004-2006 and his 22.4 Forecast Low PE on eliminating the 2 years 2004-2005. 

(B) I saw that CTSH’s High and Low PEs were trending down and used 2008, the lowest in the last five years, as my Forecast High and Low PEs (25.5 and 10.2).

(C) Take Stock used 30.0 as its Forecast High PE, isn’t designed to look for trends, and always uses a two-step methodology:

** TS first eliminates the five highest High PEs in the last 10 years and averages the rest.  It then limits High PEs to 1.5 times its estimated EPS growth or, in this case, to 30.0 (1.5 x 20.00 = 30.0) which is the maximum it will ever forecast no matter how high the company’s actual PEs.  A 30.0 High PE is equivalent to a 1.5 High PEG maximum.

** TS used 14.7 as its Forecast Low PE which came from eliminating the five highest Low PEs in the last 10 years and averaging the rest. If that average was more than 20.0 (not the case here), TS would limit the Low PE to a Low PEG of 1.0 max (1.0 x 20.00 = 20.0).

Forecast High Price:

(A) With his 15.00% estimated EPS and 33.3 High PE, Bud got $107.60 for his Forecast High Price which was a whopping 65% greater than the high end of Value Line’s estimated $40-65 High Price on 8-21-09 and 43% greater than VL’s updated $50-75 estimate on 11-20-09.

** That’s way too high for me and I never want to substantially exceed VL’s estimate; see: Determining What’s Reasonable and What’s Not: An Update

(B) With my 16.00% estimated EPS and 25.5 High PE, I got $85.90 for my Forecast High Price which was 32% greater than VL (and only 14.5% greater than VL’s updated estimate).

** 32% is usually too high for me and I prefer to be no more than 20-25% higher than VL.  Because both of my SSGs did not statisfy the Buy criteria (UD >3.0 and TR >15%), there was no point to lower my judgments.

(C) With its 20.00% estimated EPS and 30.0 High PE, Take Stock got $107.70 for its Forecast High Price which, like Bud, was also a whopping 65% greater than the high end of Value Line’s estimated High Price of $40-65 and also 43% greater than VL’s updated estimate.

Forecast Low Price:

(A) Bud inexplicably reduced his Forecast Low EPS to 2007’s $1.15 and then disregarded the Low EPS x Low PE option, which is most appropriate for growth companies like CTSH, and decided to use $17.30 which he also did not explain.

(B) & (C) Take Stock and I used the same method (Low PE x Low EPS), but got much different results because TS used a much higher Low PE than I did (17.7 vs 10.2).

Quality:

(A) Bud and Armin-1 used Hemscott-Morningstar data which does not provide any Quality rating.

(B) Armin-2 used S&P data and gave Cognizant a B+ Quality rating which ranked fourth out of its 8 ratings.

(C) Although Take Stock gave Cognizant high marks for its recent and historic growth, CTSH’s downtrend in PTPM resulted in an overall Quality rating of 3.2 which is unacceptable.  TS requires a 3.4 minimum to pass muster and a 6.7 is desired.

Pretax-Profit Margin (PTPM) and Return on Equity (ROE):

–  Cognizant’s five-year average PTPM of 19.8% is trending down which usually is a red-flag warning sign.  However, CTSH is better than its Industry Average of 16.7% (Business Software & Services, Hemscott data) and ranks 14^th out of 135 companies.

– Cognizant’s five-year average ROE of 21.5% is also trending down.  But, that is far less than CTSH’s industry average of 78.3% which is substantially distorted by 5 companies with ROEs over 100%.  Nevertheless, CTSH still ranks 15^th out of 135 despite the distorted average.

–  For more on using Industry Information to inform our SSGs, see: Investigating Industry Info

Questions:

(1) Are you bothered by Cognizant’s PTPM and ROE downtrends, or does my assessment satisfy you that they are not red-flag warning signs of potential trouble?  If you’re not satisfied, what else would you want to look at??

(2) CTSH has excellent Sales and EPS growth (both historic and expected), but does not satisfy the SSG’s minimum BUY criteria of a 15.00% Total Return and a 3.0 Upside/Downside Ratio. 

At this time, would you buy Cognizant based on my SSG with its 13.9% TR and 1.4 U/D? Would you have bought it based on Bud’s SSG with a 22.2% TR and a 3.1 U/D??

I like CTSH a lot and have followed it for several years; see:  Two Small Company Stocks: Cognizant Technology Solutions (CTSH) and Jack Henry and Associates (JKHY), September 5, 2006 (CTSH is no longer considered a small company).

– Armin

  _________________________________________________

Footnote 1:

Forbes 25 Fastest Growing Tech Stocks (#7 in 2009),  http://www.forbes.com/forbes/2009/0216/048b.html

BusinessWeek’s Top 50 Companies (#31 in 2009),   http://images.businessweek.com/ss/09/03/0326_bw50/21.htm

BusinessWeek’s Hottest Tech Companies in 2009 (# 51),  http://images.businessweek.com/ss/09/05/0521_IT_100/52.htm

Fortune 100 Fastest Growing Companies (seventh consecutive year, #90 in 2009),  http://money.cnn.com/magazines/fortune/fortunefastestgrowing/2009/snapshots/90.html

Fortune 1000 (#716 in 2009),  http://money.cnn.com/magazines/fortune/fortune500/2009/full_list/701_800.html

Forbes The Global 2000 (no rankings, 2009 Software & Services Industry) , http://www.forbes.com/lists/2009/18/global-09_The-Global-2000-Software-Services_9Rank.html

Checking Out Coach (COH)

[AF addendum: PV’s SSG and First Cut write-up, discussed below, are also summarized in the January 2010 issue of Better Investing magazine.]

– Coach (COH) designs, makes and sells luxury apparel, primarily expensive women’s handbags, and has been hard hit by our current recession.  My software’s PERT-A shows steadily declining EPS growth for the last 8 consecutive quarters with COH’s worst performance in the last quarter (ending 9-30-09) at -8.1% EPS, worse than its -6.8% in the prior quarter.

– However COH’s stock price has gained 60% in the last 12 months (from around $12 per share to $33), some 35% in the last 6 months, and almost nothing in the last month.

–  Is Coach a good SSG Buy at this time which means, to SSGers, is it a good growth company that is selling at a good price? Let’s see.

Company Background:

– According to Wikinvest and COH’s latest Annual Report, the company operates in two segments: Direct-to-Consumer that consists of Coach-operated retail stores in North America, Japan, Hong Kong, Macau, and mainland China (84% of FY 2009 sales); and the Indirect segment that includes twp units, United States Wholesale and Coach International, both of which supply department stores and other authorized retailers.

** Women’s handbags are the company’s main driver of sales even though Coach has been trying to diversify its product lines.  Handbags have gone from 65% of sales in FY 2006 to 62% in FY 2009 while accessories have increased from 28 to 29% and all other products also have increased from 7 to 9%.

** In addition to product diversification, Coach has several other plans to spur future growth: 

>> a new ultra-luxury division that will sell expensive apparel in a small number of independent boutiques, not in Coach stores;

>> a new Poppy collection that is targeted to younger women which, in Q1 FY 2010, increased the company’s sales by 1%;

>> aggressive expansion into China, to capitalize on the emergence of its growing middle class, with plans to open 50 retail stores in the next 5 years and increase its market share from 3 to 10%.

– Coach has 330 full price stores and 111 factory stores in North America, 155 stores in Japan, and 128 stores in other parts of the Far East.

– Two years ago, COH was BI’s Growth Company of the year.  At that time it was selling for $44.53 per share and looked like a SSG Buy to me.  See:  Coach (COH): Better Investing’s Growth Company for the Year 2007,  September 3, 2007  

Company Financials:

– Value Line rated Coach an “A” for Financial Strength with $800 M in cash assets and only $25 M in debt.  Morningstar held that Coach was in “excellent” financial health with little debt and the ability to turn about 20% of its sales into free cash flow.

– The super-duper Annual Report spreadsheet by Bob Adams gave Coach’s 2009 A.R a 44 out of 100 with 9 Bullish and 9 Bearish results:

** The Bullish-good things included increasing sales and they are increasing faster than cash flow, reasonable debt to equity, and good return on free cash flow.  The Bearish not-so-goods included increasing accounts receivable and inventories, the cost of sales increasing faster than sales, and free cash flow less than sales growth;

** You can get this free spreadsheet and an explanation of its many features by going to my Favorite Links page: click here.

– In April 2009, the Coach Board voted to initiate a cash dividend of $0.30 per share.

Discussion:

– Here’s a table comparing P.V.’s SSG, which I got from the BI First Cut page, with two of mine and with Take Stock.  The only difference between my two SSGs is that Armin-1 uses S&P data from the Better Investing website while Armin-2 uses Hemscott-Morningstar data from the StockCentral website.

– After the table, I discuss issues identified by the comparison.

Coach                   (COH)	P.V.	Armin-1	Armin-2	Take Stock
Date	10-21-09	10-29-09	Same	Same
Data	S&P	S&P	Morningstar- Hemscott	Same
Price	$33.14	$32.87	Same	$31.83
52 week High       & Low Price	$35.47 &         $11.41	Same &             Same	Same &             Same	Not                             Included
Last Quarter              of Reported Data	Q1 ending             9-30-09	Same	Q4 ending              6-30-09	Same
Software Used	TK 5	Same	Same	Online TS
Project Growth        From End of	Last FY	Last Q	Same	Last FY
Sales Growth	12.00%	13.00%	Same	01.50%
EPS Growth	15.40%	13.00%	Same	-10.80%
High PE	27.0	21.1                   (3 yrs out)	21.5                   (Same)	25.2
High EPS	$3.91	$3.54	$3.53	$1.88
High Price	$105.60             (78% > VL as    of 8-7-09)	$74.70               (25% > VL)	$75.90             (27% > VL)	$27.21                    (15% < current price
Value Line Estimated High Price =$40-60 as of 8-7-09 and $45-65 as of 11-6-09
L ow PE	11.0	8.6                      (3 yrs out)	8.7                   (Same)	10.2
Low EPS	$1.92	Same	$1.91	$1.91
Low Price	$15.00               (“other” option)	$16.50                 (low PE x low EPS option)	$16.60             (Same)	$19.48
Upside/Down	4.0	2.6	1.7	Impossible to Calculate
Total Return	26.6%	17.8%	13.1%	-02.8%
SSG Buy Under	Not Available	$36.05	$27.55	$13.78
RV/PRV	82.4/71.2           (no outs)	114.8/101.7        (3 yrs out)	113.9/105.5 (Same)	Not                  Included
RV/PRV(no outs)	82.4/71.2	81.4/72.1		Not                         Included
Quality	Not Available	S&P = B+	Hemscott =       Not Included	1.10 (unacceptable)
PTPM – 5 yr ave	36.7%         Trend down	Same                 Same	36.2%               Same	Same                   Trend N/A
ROE – 5 yr  ave      End Equity	38.0%         Trend down	Same                  Same	38.6%                Same	Not                                Included
ROE – 5 yr ave     Start Equity	Not                       Available	45.9%                  Trend down	46.5%               Same	Same                         Trend N/A
Debt to Equity –      5 yr ave	Not                        Available	0.5%                   Trend up	Same              Same	Not                                Included

Estimating Future EPS Growth:

(1) P.V. used the BI/NAIC Preferred Procedure to estimate 15.40% EPS and wrote that unidentified analysts were estimating 15.30% which I did not find.

(2) I now check seven different analysts (up from six) for their long-term EPS estimates which averaged 13.71% for Coach with FactSet via Morningstar.com (the new source) high at 15.60% and Value Line low at 7.50%.  Thomson Reuters via YahooFinance was 13.08%, Reuters.com was 14.35%, S&P and FactSet CallStreet via CNN Money were both 15.00%, and Zacks.com was 15.41%.

** The 9 analysts at FactSet CallStreet via CNN Money ranged from a low of 8.00% to a high of 25.00% as did the 11 analysts at Reuters.

** Value Line’s estimate of 7.50% looks like an outlier so the average without VL is 14.74% [VL’s 7.50% estimate remained unchanged in its 11-6-09 report].  That average less 1 Standard Deviation is 13.82% and less 2 SDs is 12.90%.

** I decided to use 13.00% (12.90% rounded) and thought that the 8.00% low estimates at CNN Money and at Reuters as well as VL’s 7.50% were too low compared to the other estimates.  My estimate is conservative based on the average without VL less 2 SDs.  Unlike PV, whose estimate was optimistic, I saw no turn-around in COH’s declining EPS growth or any other ground to be optimistic.

** For how I estimate EPS for all my SSGs, see Estimating EPS which I have updated to include the new source, FactSet via Morningstar.com.

(3) Take Stock estimated -10.8% (that’s a negative 10.8%) EPS growth for the next 5 years which seems way, way unreliable, untrustworthy and unreasonable compared to the other estimates.

Forecast High Price:

(1) P’s 27.0 Forecast High PE (times) his $2.70 Estimated High EPS (equaled) his $105.60 Forecast High Price which was a whopping 78% greater than Value Line’s High Price estimate of $40-60.

** That’s way too much for me!! See: Determining What’s Reasonable and What’s Not: An Update.

(2) My 21.1 Forecast High PE (2005-06-07 eliminated as outliers) x my $3.54 Estimated High EPS = my $74.70 Forecast High Price which was 25% greater than VL’s estimate.

** Usually, I don’t like to exceed Value Line by such a la.rge amount, but I thought VL’s estimates were low-balls, especially its 7.50% EPS estimate. 

** Just as importantly, I still did not satisfy the SSG Buy criteria despite my high Forecast High Price as my 2.6 Upside/Downside Ratio was below the 3.0 requirement.

(3) Take Stock got a $27.21 Forecast High Price in the next 5 years which was less than Coach’s current price of $31.83.  Bizarre! Implausible!! Unbelievable!!!

Pre-Tax Profit Margin (PTPM) and Return on Equity (ROE):

(1) P did not address the down trends in Coach’s PTPM and ROE, although he did find that COH’s 5-year averages were better than the averages for what he called the Apparel Industry.

(2)  I found that S&P places Coach in the Textile – Apparel & Luxury Goods Industry and that COH was much better than those Industry Averages, although my industry numbers were somewhat lower than P’s.

(3) I also found that Hemscott-Morningstar places Coach in the Apparel, Accessories & Luxury Goods Industry where COH is also much better than its Industry Averages ranking #2 out of 24 companies for both PTPM and ROE.

** While Take Stock uses Hemscott data, TS sadly does not make industry comparisons.

Final Results:

(1) P.V. satisfied the SSG Buy criteria (a minimum 3.0 Upside/Downside and 15% Total Return) with a 4.0 U/D and a 26.6% TR.  However, to do so, his Forecast High Price exceeded Value Line’s estimate by a enormous 78%.

** Any SSG can be prepared that satisfies the Buy criteria if we are not concerned with using reasonable judgments.  Just claiming “This or that seems reasonable” is not adequate.

(2) Armin-1 and Armin-2 did not satisfy the SSG Buy criteria as both got a U/D under the minimum 3.0 criteria even though my Forecast High Price was 25% greater than VL’s estimate with S&P data and 27% greater with Hemscott data.

(3) Take Stock got a -2.8% Total Return (that’s a negative 2.8%) and deliberately does not use the Upside/Downside concept.

** Take Stock’s analysis was doomed from the start when it began with a –10.8% (that’s a negative 10.8%) EPS estimate.  As a result, its Forecast High Price was less than its current price which makes it impossible even impute any U/D.

** Lastly, a Forecast High Price that is low, and that is lower than the stock’s current price, is absurd in my judgment.

-Armin