Michael Kors (NYSE:KORS) has been one of the most spectacular stocks since its IPO at the end of 2011. In the last 3 years, the company has increased its earnings per share (EPS) by about 10 times, from $0.30 to $3.12, and the stock has followed this exceptional performance, almost quadrupling. The best proof for the strength of the business of Michael Kors is that the above exceptional growth has been achieved without any debt; to be sure, the company has a net cash position of $4 per share. At the moment the stock is trading at a forward P/E 23, which represents a normally expensive level but may be a great bargain if the company keeps growing at the recent rate.
Therefore, the big question is whether the company can keep growing at a very fast rate (50%-100% per year) or it will greatly decelerate in the next few years. While this question is less important for stocks trading at a normal P/E of about 15, this question is critical for stocks with a high P/E because the answer will determine whether the investment will be extremely profitable or a disastrous loss.
First of all, Michael Kors generates 85% of its revenue in North America, which means that there is plenty of growth potential in Europe. This is indeed what the management has emphasized in its annual report. Even better, the management believes there is still potential to double the number of its retail stores in the US so there is ample room for growth in the US as well. Therefore, based on the figures and the management's outlook, the company seems to have ample room for future growth.
Although the figures and the management's outlook can be fairly reliable, the actions of the management as far more important than its words. Therefore, in my opinion, the best indicator of the potential for future growth in a company with such a strong balance sheet is the absence of a dividend. To be sure, it is helpful to examine the case of the main competitor, i.e., Coach (NYSE:COH), which is a much older company. Coach exhibited great growth from 2000 to 2012 but only initiated a dividend in 2009, i.e., 3 years before the end of the high-growth era.
Although the lag phase between the dividend initiation and the end of the growth phase will definitely vary across different companies, it is very reasonable to conclude that Michael Kors has safe growth ahead as long as it does not initiate a dividend. Coach (both the business and the stock) peaked 3 years after the initiation of a dividend but Michael Kors has grown much faster than Coach so its peak may form much sooner than that of Coach.
On the other hand, when looking at Coach to draw useful conclusions, there is a red flag for caution for Michael Kors. Coach has a market cap of $14 B while Michael Kors has already greatly exceeded it, with a market cap of $18 B. A reasonable investor may wonder whether the market cap of Michael Kors can exceed that of Coach by 2 or 3 times.
Moreover, when evaluating fast-growth stocks, one should never forget the legendary investor Peter Lynch, who specialized in this type of stocks. One of the axioms of Peter Lynch was that a company should make efforts to grow fast but not extremely fast because that will inevitably lead to a collapse. So far Michael Kors has grown extremely fast and hence it is prudent to remember the words of Peter Lynch when evaluating this company.
Finally, a factor to consider is that some momentum stocks seem to be having a tough year in 2014, as the majority of the investors has been switching from momentum stocks to value stocks. It is even more impressive that most momentum stocks rise or fall together almost every day even though they are completely irrelevant to each other. For instance, Michael Kors rises or falls on the same days as Facebook (NASDAQ:FB). Of course the only importance of this market behavior is that the prospect shareholders of Michael Kors should be prepared for high volatility; if they do not possess a strong enough stomach to handle high volatility, they are condemned to sell at a loss even though the business may perform greatly.
To sum up, despite some red flags for caution mentioned above, the figures and the absence of a dividend make me conclude that Michael Kors has still great growth potential ahead. However, due to its high market cap, its extremely fast growth and the fast-changing profile of almost every sector (including the retail), this stock should not be considered a buy-and-hold stock. I will buy the stock at around $87 ($85 is a strong support so far) and will probably sell the stock once the company initiates a dividend.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.