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Here is a look at how Coach Inc. (COH) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - FAIL
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3-year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio - PEmg is less than 20 - PASS
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value$92.02
MG OpinionUndervalued
Value Based on 3% Growth$48.24
Value Based on 0% Growth$28.28
Market Implied Growth Rate4.23%
Net Current Asset Value (NCAV)$2.72
PEmg16.95
Current Ratio2.65
PB Ratio6.65

Balance Sheet - 9/30/2013

Current Assets$1,872,100,000
Current Liabilities$707,400,000
Total Debt$500,000
Total Assets$3,487,400,000
Intangible Assets$372,900,000
Total Liabilities$1,108,800,000
Outstanding Shares280,420,000

Earnings Per Share

2014 (estimate)$3.34
2013$3.61
2012$3.53
2011$2.92
2010$2.33
2009$1.91
2008$2.17
2007$1.69
2006$1.27
2005$1.00
2004$0.68
2003$1.25

Earnings Per Share - ModernGraham

2014 (estimate)$3.33
2013$3.17
2012$2.82
2011$2.38
2010$2.03
2009$1.79

Conclusion:

Coach Inc. is a very strong company, with healthy financials and a very consistent and promising level of growth in earnings. The company is not suitable for the Defensive Investor, having failed the PB ratio requirement and the Dividend Record requirement. The company passes all of the requirements of the Enterprising Investor, and that investor type should feel comfortable proceeding with further research, beginning with a review of some Defensive Investor companies.

From a valuation standpoint, the company has grown its EPSmg (normalized earnings) from $1.79 in 2009 to an estimated $3.33 for 2014. The market implies a growth rate of 4.23%, a rate which is easily supported by the earnings history. As a result, the company appears to be undervalued at the current time and there may be an opportunity for profit.

What do you think? Do you agree that Coach Inc. is undervalued? What would be your assessment? Is the company suitable for Defensive Investors or Enterprising Investors?

Disclosure: The author held a long position in Coach Inc. (COH) at the time of publication and had no intention of liquidating that position within the next 72 hours.

Source: ModernGraham Valuation Of Coach Inc.