Put me in, Coach?
I can’t believe how ubiquitous Coach products are. Living in Southern California, I see so many Coach handbags, purses (how’s a purse any different than a handbag?), shoes, key rings, ... and the list goes on. Have you ever looked to see how much these products cost? I heard that key rings were a bargain, so I stumbled on over to the Coach web site. Lucky for me, I found out that I can purchase a “BLEECKER CHARM KEYFOB” for $98. Hot damn!
Okay, okay. I’m not writing about Coach (symbol COH) to mock their pricing. More important, is COH stock is a good buy right now? It closed today (Nov. 29, 2007) trading at just under $36/share.
Let’s go through some cursory analysis. According to Yahoo! Finance, here are some rounded-off COH stats of interest:
Market cap: $13.2 billion
Trailing P/E: 19.6
Forward P/E: 14.6
Revenue: $2.8 billion
Net income: $656 million
Total cash: $1.2 billion
Long-term debt: $3 million
52-week high: $54.00/share
52-week low: $30.52/share
Does anything stand out to you? My first thoughts are:
- COH makes decent profit.
- COH’s P/E is reasonable (according to www.standardandpoors.com, the average P/E of S&P 500 stocks was 18.25 for the month ending Oct 31, 2007).
- COH has a chunk of cash on hand.
- COH’s long-term debt is trivial.
- COH’s stock price is near its 52-week low.
Looks good to me. Let’s put more of the puzzle together.
EPS
For the most recent quarter ended Sept. 29, 2007, basic EPS was $0.42/share, up 24% from $0.34/share during the equivalent period in 2006.
Shares Outstanding
The average # of shares outstanding for the quarter ended Sept. 29, 2007 were 372.2 million, up 1.1% from 368.1 million for the equivalent period in 2006. More shares = Dilution. I’m not a fan of dilution, although granted in this case it’s not extreme. I'd prefer to see the # of outstanding shares decrease, not increase.
When a company makes money and we own shares, we want those shares to represent bigger portions of the pie. According to the most recent 10-Q filing with the SEC, COH has been using cash to buy back stock. This is a good thing. Had COH not bought back stock, the dilution would be worse.
Given that the company bought back stock within the last year, why were there more outstanding shares in the quarter ended Sept. 29, 2007 as compared to the equivalent time period in 2006? It looks as though COH spent $132 million buying back stock over the year ending Sept. 29, 2007. COH also grants stock options and share awards to its employees. It would make sense, then, that the number of shares repurchased is smaller than the number of shares added to the pool through share grants and exercising of options over that time period.
Is COH going to repurchase any more stock and thus curb dilution? According to the company’s 1Q2008 10-Q, in October 2006 the COH Board of Directors had authorized share repurchases totaling $500 million. As part of that share repurchase program COH has spent $132 million thus far for approximately 3 million shares at an average price of $43.72/share. That means $500 - $132 = $368 million remains available to repurchase shares. Nice.
Given COH’s strong cash position, they won’t need to take out loans to complete the authorized repurchases. I wouldn’t be surprised if, compared to what they’ve done so far under the current authorization, COH is more aggressively repurchasing shares at these near $30/share levels.
Keep in mind, too, that the COH Board of Directors has authorized six share repurchase programs since 2001. As COH continues to grow and accumulate cash, I would expect more share repurchase programs to be announced and executed.
What are the insiders doing?
Although I wouldn’t ever base a stock purchase solely on insider trading activity analysis, sometimes insider behavior is worth considering. According to Yahoo! Finance’s COH insider activity page, insiders sold shares pretty consistently throughout the year. The most recent insider sale was at nearly $51/share back in September 2007. Nothing since then. What might that tell you? It might be the case that COH insiders believe the stock has significant upside potential. If they anticipated that COH would drop further, wouldn't they sell now to maximize their profits? According to the 10-Q, there are options available to be exercised profitably. Put a slightly different way, why should COH insiders sell now if they figure COH will trade higher in the near future?
Keep in mind that this insider activity analysis is pure speculation on my part, but it makes sense to me to consider it when trying to form a big-picture view of the company and the stock.
Coach falls into the retail industry. What will happen if there’s a recession?
Lately, retail certainly hasn’t been the best-performing industry. When recession fears kick in, people get out of retail stocks. Although that macro situation likely will put some downward pressure on the stock, I think that COH is set up well to weather a recession storm like that. Given how freakin’ expensive Coach products are, I would guess that today’s average Coach product buyer isn’t too concerned about conserving cash. Coach product buyers are probably reasonably well off as it is, so I doubt their spending habits would change much in a recession. That’s my [possibly bogus] assumption, anyway.
Conclusion
COH looks like a healthy company to me. Sales and profits are rising year over year. The balance sheet looks good. Management is increasing shareholder value through stock repurchase programs. Besides a dividend, what more could you ask for? With the stock trading at a P/E that’s only slightly higher than the average S&P 500 stock, Coach at $36/share sounds good to me. In fact, I figure COH will be trading back up to $50/share by March 2008. If I were going to make a COH stock purchase I would buy a small portion (1/4th?) of a position first so that if the stock drops lower, I can pick up more shares at bargain prices. If it goes up from here, there’s no sense pouting over profit!
Full disclosure: I do not have any position, long or short, in COH at the time of writing.
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