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