Has Coach Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Coach (NYSE: COH  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Coach.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 14.1% Fail
  1-Year Revenue Growth > 12% 13.2% Pass
Margins Gross Margin > 35% 72.3% Pass
  Net Margin > 15% 21.2% Pass
Balance Sheet Debt to Equity < 50% 1.3% Pass
  Current Ratio > 1.3 2.34 Pass
Opportunities Return on Equity > 15% 52.7% Pass
Valuation Normalized P/E < 20 25.28 Fail
Dividends Current Yield > 2% 1.2% Fail
  5-Year Dividend Growth > 10% NM NM
       
  Total Score   6 out of 9

Source: S&P Capital IQ. NM = not meaningful; Coach has only paid a dividend since 2009. Total score = number of passes.

Since we looked at Coach last year, the company has lost a point. A slowdown in the high-end retailer's long-term sales growth may be cause for concern, but Coach has plenty of growth opportunities left.

Retail is typically a low-margin business. But Coach has consistently found a path to generating strong margins, with a healthy balance sheet and strong cash flow to boot. Cashing in on the potential for international growth, Coach has made several moves to bolster its global presence, taking control of retail outlets in certain parts of Asia and expanding with new stores in Europe.

One trend that Coach has seen lately is that shoppers are choosing accessories over clothing purchases. That bodes well not just for Coach but also for Tiffany (NYSE: TIF  ) and Michael Kors (NYSE: KORS  ) as well. In fact, Tiffany and Kors may do better than Coach, because Tiffany aims very high on its price points and Kors has both high-end and low-end collections, while Coach sticks mostly at the lower end of the accessories market.

One area where Coach needs to improve is in its dividend payout. Luxury-oriented peers Williams-Sonoma (NYSE: WSM  ) and Nordstrom (NYSE: JWN  ) both pay higher dividend yields despite having similar demands on capital for internal investment. One could argue, though, that Coach is seeking to expand faster than either Nordstrom or Williams-Sonoma, and so spending more now to make more later is a smart move.

In the end, the overall global economy will play a huge role in Coach's success. If growth in emerging markets continues, Coach will be right there to take advantage of it.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

Coach isn't perfect yet, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Coach to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Coach and Williams-Sonoma. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 08, 2012, at 1:12 PM, gdett2 wrote:

    Dan,

    6 passes of 9 is not bad. I believe the fails are questionable.

    Revenue growth of 14.1% vs 15% is not far off and for the market this company has been in from 2007, I believe the 14% is great.

    Dividend yield below 2%. I did not invest in COH for dividends. It doesn't pay enough for that.

    Dividend growth is not an issue either. They started paying in 2009 and have raised the dividend 100% in 2010 and 50% in 2011. It just doesn't have the 5 years you looks for.

    Gene COH 2-bagger since June 2010

  • Report this Comment On March 09, 2012, at 11:06 AM, TMFPennyWise wrote:

    I thought it was interesting to hear on the Luxottica (the major sunglass manufacturer and distributor of popular designer brands) investment webcast a preliminary overview of their new partnership with Coach.

    Apparently their new Coach sunglasses sold out immediately when introduced earlier this year. And the LUX management was very surprised at how fast the Coach sunglasses supply was exhausted. That says something for your projection that accessories will be an important component of revenues.

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