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Founded as a leather workshop in 1941, Coach,Inc. (COH) is now a multi-billion dollar company. With its wide range of products, from handbags and shoes to jewelry and perfume, Coach has seen some amazing growth in the past few years. In this article, I will be judging COH on its growth in recent years, as well as its expected future growth. I will also take a look at its valuation. I will be comparing COH to Fossil, Inc. (FOSL), NIKE, Inc. (NKE) and Ralph Lauren Corp. (RL)

Let's start by looking at COH's sales.

The graph below shows COH's sales and net income over the past 10 years. I have also included revenue-estimates for 2013 and 2014 (from Yahoo Finance).

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As we can clearly see, both revenue and net income have been growing at a steady pace. Over the past 10 years, revenue has grown from $953 million to $4.75 billion. Net income was just over a billion dollars in 2012, which is almost 7 times as high as in 2003. Coach has had a pretty stable profit margin over the past 10 years, with a 10-year average of 21.41%. If COH can continue to make the same profits per dollar of revenue, net income will reach $1178 million in 2014, 13% higher than in 2012.

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Returning money to shareholders: dividends and share repurchases.

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Having already gone from $0.40 in 2003 to $3.53 in 2012, analysts expect EPS to grow even higher in 2013 and 2014. This will give COH the opportunity to reward its shareholders with even higher dividends. The current dividend stands at a respectable $0.30 quarterly. This gives us an annual dividend yield of 2.36%, which is a lot higher than its competitors.

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Over the past four years, Coach's dividends have risen at a fast pace. The dividend for 2012 was $0.98 per share, giving COH a payout ratio of 27.8%. The next table shows the yield on cost we will receive at various EPS and payout ratio combinations.

25% payout ratio

30% payout ratio

35% payout ratio

40% payout ratio

$3.80

1.87%

2.24%

2.61%

2.99%

$3.90

1.92%

2.30%

2.68%

3.06%

$4.00

1.96%

2.36%

2.75%

3.14%

$4.10

2.01%

2.42%

2.82%

3.22%

$4.20

2.06%

2.48%

2.89%

3.30%

If COH were to bump up its payout ratio only slightly, to 35%, we could see a yield on cost of over 2.8% as soon as 2014. This is of course if analyst expectations are correct. But even if COH's EPS doesn't grow as fast as expected, we could still get a pretty nice dividend yield.

Over the years, COH has bought back a large amount of its own shares. This is good for investors, as it causes each share in your portfolio to represent a bigger piece of the overall business. Between 2003 and today, the number of shares has decreased by 89 million, or 24%. With its increasing profit and low payout ratio, I expect COH to have sufficient funds to continue its share repurchases.

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To show just how impressive COH's share repurchases are, the next graph shows the change in share count for COH, RL, NKE and FOSL. The only company in our comparison that even comes near COH is FOSL, having decreased the number of outstanding shares from 73 million to 61 million.

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Valuation and Conclusion: A great company for a very low price.

First we will compare p/e ratios for COH and its competitors. As can be seen in the graph below, COH is clearly the cheapest on a p/e ratio basis.

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Next, let's look at Coach's historical valuations. The next graph shows p/e ratios for each of the past 10 years. I have also included five and 10-year averages. At its current price-to-earnings ratio of 14.1, COH is well below both its 10-year average (22.4) and its five-year average (16.5). So, even with high expected growth for both revenue and EPS, COH is still very cheap.

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Source: Why Coach Is Better Than Its Competitors