Each week I cull a top stock idea from the pitches made on CAPS, the Motley Fool's 180,000-member free investing community. Want your idea considered for this series? Make a compelling pitch on CAPS with a minimum length of 400 words. Want to follow the weekly picks? Follow me on Facebook or Twitter.
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Company |
Coach (COH +0.94%) |
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Star Rating |
**** |
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Industry |
Consumer goods |
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Market Cap |
$13.93 billion |
Sources: S&P Capital IQ, Yahoo! Finance, and Motley Fool CAPS.
Coach investors have had a rough year, with the stock down almost 35% in the past year and down 10.5% year to date after the company missed earnings expectations in January. The company is attempting to reinvent itself as a "lifestyle" brand as it strives to compete with fast-growing competitors Michael Kors (KORS +0.76%), Ralph Lauren (RL +2.94%), and Tory Burch, which benefit from their famous founding fashion designers. The stock is down as investors are nervous over the company's transition which will include a new CEO next year. Some investors think the drop is an opportunity, including CAPS All-Star NovaTodd. Last September, NovaTodd picked the stock to outperform the market over the next five years, and just last week, NovaTodd made a pitch for Coach.
Coach Outperform Pick
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Pitch Submitted By: | |
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Member Rating: |
84.80 |
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Submitted On: |
March 20, 2013 |
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Stock Price at Original Outperform Recommendation: |
$53.33 |
Sources: S&P Capital IQ, Yahoo! Finance, and Motley Fool CAPS.
This Week's Pitch:
I bought yesterday at $48.00. I consider this a bargain for a company with such an outstanding track record of efficiency and profitability. ROIC has been consistently north of 40% over the past several years, and checked in at 56% last year; sales per square foot is close to $2,000 and ranks among the very best in the retail sector. Coach has a rock-solid balance sheet with a strong cash position and minimal long-term obligations; in fact, FCF generated last year alone adds up to about 80% of total liabilities on the balance sheet.
The valuation looks good right now: Price/Cash Flow is about 11.5, which is below the industry average of 16 and the company's own five year average of 15. The shares yield 2.4%, and the current dividend payout is only about 35% of free cash flow. Realistically, the shares could yield north of 4% in five years using the current price and applying a fairly conservative growth estimate to the dividend. The share count has also been in decline over the past few years.
I'm no fashion aficionado, but I think Coach has built a durable brand that will continue to command a premium price for the next several years.
