Michael Kors Holdings Ltd (KORS) and Coach, Inc. (COH) are two large-cap companies with high margins, strong ROE and cash flow, and a healthy balance sheet. Both stocks had received positive upgrades from analysts recently and will be analyzed fundamentally and technically in this article. Investing strategies will also be reviewed.
Michael Kors Holdings Ltd
KORS was up 3.96% and closed at $58.51 on March 13, 2013. KORS had been trading in the range of $35.50-$65.10 in the past 52 weeks. KORS has a market cap of $11.72B.
On Mach 13, 2013, Avondale Partners upgraded KORS from market perform to market outperform. This upgrade was based on favorable risk/reward and checks that indicate favorable trends at the end of February, 2013. On March 3, 2013, Sterne Agee initiated coverage on KORS with a neutral rating and a price target of $63.00. Analysts currently have a mean target price of $74.08 with a median target price of $75.00 for KORS. Analysts, on average, are estimating an EPS of $0.39 with revenue of $548.05M for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $1.86 with revenue of $2.12B, which is 63.10% higher than 2012.
There are a few positive factors for KORS:
- Higher operating margin of 28.2% and net margin of 17.3% (vs. the industry averages of 8.3% and 11.8%)
- Stronger ROE of 36.8 (vs. the industry average of 25.0)
- Zero debt/equity (vs. the industry average of 0.2)
- KORS generates an operating cash flow of $247.11M with a levered free cash flow of $132.59M
Technically, MACD (12, 26, 9) indicator is showing a bearish trend. The momentum indicator, RSI (14), is picking up and is currently neutral at 50.80. KORS is currently trading above its 200-day MA of $50.43 and has broken through and closed above its 50-day MA of $56.83 in the last trading day. The next resistance is $64.33, the R1 pivot point, followed by $71.38, the R2 pivot point, as seen from the chart below.
How to Invest
With its solid balance sheet, high margins, and strong growth, KORS remains a good long-term holding. If KORS can stay above its 50-day MA, it may be due for a technical rebound. For bullish investors, a credit put option spread of May 18, 2013 $49/$52.5 put can be reviewed. Investors can also review the following ETFs to gain exposure to KORS:
- ISE Chindia Index Fund (FNI), 6.95% weighting
- Large-Cap Growth Equity Strategy Fund (RWG), 3.34% weighting
COH was up 1.76% and closed at $49.67 on March 13, 2013. COH had been trading in the range of $45.87-$79.70 in the past 52 weeks. COH has a market cap of $13.95B with a beta of 1.60.
Our take is that COH stock has transitioned from a growth stock to value, & we're upgrading as we believe stock appropriately prices in caution & has good upside potential. We're upbeat on upside because we believe the Coach brand remains relevant, COH's plan to transition to a multi-category lifestyle brand will ultimately work, & free cash flow, absolute ROIC, net cash, return of funds, & COH's mgmt team remains top notch. COH has moved from a 20s-range P/E to 11.7x as comp sales have slowed from +DD in 2011 to -2% last quarter & op. margins have leveled off to ~31%.
Analysts currently have a mean price target of $60.94 and a median price target of $59.47 for COH. Analysts, on average, are estimating an EPS of $0.81 with revenue of $1.19B. For 2013, analysts are projecting an EPS of $3.71 with revenue of $5.11B, which is 7.20% higher than 2012.
There are a few positive factors for COH:
- Higher revenue growth (3-year average) of 13.8 (vs. the industry average of 2.4)
- Higher operating margins of 31.4% and net margin of 21.3% (vs. the industry average of 8.3% and 11.8%)
- Stronger ROE of 53.2 (vs. the average of 25.0)
- Lower P/E of 13.5 (vs. the industry average of 25.1)
- Lower Forward P/E of 11.9 (vs. the S&P 500's average of 13.9)
- COH has a total cash of $858.66M and a total debt of $22.71M
- COH generates an operating cash flow of $1.22B with a levered free cash flow of $752.78M
- COH currently offers an annual dividend yield of 2.42%
Technically, the MACD (12, 26, 9) indicator is showing a bullish trend. RSI (14) is nearly neutral at 51.65. COH is currently trading below its 50-day MA of $51.65 and 200-day MA of $55.67. The next support is $45.40, the S1 pivot point, followed by $42.75, the S2 pivot point, as seen from the chart below.
How to Invest
With a solid balance sheet, strong cash flow, and steady growth, COH remains a buy at current valuation. For bullish investors, a credit put option spread of June 22, 2013 $42/$45 put can be reviewed. Investors can also review the following ETF to gain exposure to COH:
S&P International Developed High Quality Portfolio Fund (IDHQ), 0.70% weighting
Note: All prices are quoted from the closing of March 13, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in COH over the next 72 hours.