Fossil Group, Inc. Is a Very Attractive Buy

Fossil Group, Inc.   (NASDAQ: FOSL  ) looks like a Foolish buying opportunity, because the market seems to be missing its long-term potential. Despite solid underlying operating results, its stock hasn't gotten much love from the market. This is somewhat understandable, since the economic recovery in the United States remains tepid, and consumer spending overall was hurt by the brutally harsh winter weather.

However, those judging Fossil purely by its stock price performance are missing the bigger picture. Fossil has a lot going in its favor. It's grown its business over the past year despite the over-arching headwinds, and it has even more growth in store thanks to continued success in the emerging market. When you combine this with a fairly modest valuation, there are simply too many reasons not to ignore Fossil.

Several catalysts working in Fossil's favor
There's no doubt the U.S. economic recovery has been less than stellar. Yet Fossil has thrived over the past several years. It has grown sales by more than 15% compounded annually since 2008. This includes last year, despite the harsh winter weather that took a bite out of consumer spending in the crucial holiday period.

That's because Fossil is growing like a weed across the globe. Fossil realized growth in all business segments in the fourth quarter, led by its Asia Pacific region. Wholesale net sales in that geography increased 13% in the fourth quarter, with strong growth in watches and jewelry leading the charge. Management noted particularly strong performance in Japan and China.

Compare this to the performance of Coach (NYSE: COH  ) , which is spinning its wheels right now. Its sales in the holiday quarter declined by 6%. Earnings per share fared even worse, falling by 14%. Coach did well in its traditional men's category and in China, where sales grew 25%. However, Coach is spending a lot of money trying to build out its women's handbag and accessories business, which isn't really working out. This has resulted in deteriorating profits and margins. To emphasize, Coach's gross margin declined by three percentage points in the most recent quarter.

Fossil believes its diversified business model and success in the emerging markets will propel its future results. Its reach extends across major markets all over the world, including the extremely attractive emerging economies. In addition, it provides a wide range of different products at different price points. In all, Fossil management expects as much as 10% sales growth in 2014, including 12.5%-14% sales growth in the current quarter. This year, diluted earnings per share are expected to rise 8%.

Growth at a reasonable price
Another advantage for investors who buy Fossil at its recent price is that it's trading at a relatively cheap valuation. Despite its strong performance last year and over the past five years, Fossil shares exchange hands for just 16 times trailing earnings and 15 times forward EPS. Other companies operating in the consumer apparel and accessories space are much more richly valued.

Consider that Michael Kors Holdings (NYSE: KORS  ) trades for 30 times trailing earnings. It's true that Michael Kors is in a period of high growth, which often results in a high valuation. Indeed, Michael Kors grew revenue by 67% and more than doubled earnings per share in fiscal 2013. Still, Michael Kors trades for 23 times its forward EPS, so its high growth potential is priced in and then some, meaning investors aren't offered much downside protection.

The Foolish takeaway
While the overall economy struggles to take off, Fossil is having no trouble producing strong growth. It's growing across the world as well, particularly in the emerging markets such as Asia. Going forward, further growth is entirely possible since Asia Pacific represents just 12% of Fossil's total sales. Fossil is busily investing to build out its emerging market presence, and the results speak for themselves.

Even better, Fossil shares can be snapped up for a relatively modest valuation. After a stunning rally in the stock market last year, many growth stocks hold sky-high valuations. Fossil, on the other hand, trades for a lower P/E than the overall market and many of its industry peers. For investors interested in a high-growth stock still trading for a reasonable valuation, go with Fossil.

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Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

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