The Long-Term Case for Coach Stock: Low PE, Huge Buybacks Reducing Shares Out, Low Debt

Why don’t investors love New York-based luxury-goods purveyor Coach (COH)?

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 Chart

COH Total Return Price data by YCharts

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.

COH EPS Diluted Quarterly Chart

COH EPS Diluted Quarterly data by YCharts

Yet, despite the far-above-average results, investors have never rewarded Coach with a stratospheric PE ratio. Generally, Coach trundles along with a PE similar to that of that Ralph Lauren (RL) and significantly lower than those of Nike (NKE) and Starbucks (SBUX).

COH PE Ratio TTM Chart

COH PE Ratio TTM data by YCharts

This year Coach has struggled more than usual to get respect from shareholders. While Ralph Lauren’s PE ratio 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 Chart

COH PE Ratio TTM data by YCharts

Why? It’s possible that Coach is losing some investors to a small fashion designer and retailer called Michael Kors (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 offering.

COH Chart

COH data by YCharts

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 kind of PE ratio that Coach’s management has never come close to enjoying—despite an extraordinary record of being disciplined and treating shareholders well.

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 22%.

COH Shares Outstanding Chart

COH Shares Outstanding data by YCharts

Also, since 2009, Coach management has been more generous than Ralph Lauren’s in regards to dividends. The company’s current dividend yield is greater than 2 percent.

COH Dividend Yield Chart

COH Dividend Yield data by YCharts

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 (TIF).

COH Debt to Equity Ratio Chart

COH Debt to Equity Ratio data by YCharts

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.



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