Coach Appears Overvalued

May.25.12 | About: Coach, Inc. (COH)

Coach (NYSE:COH) shares increased ~13% YTD, but plummeted ~8% in the recent 3 months. It would appear that the drop represents an entry opportunity to this investment with decent revenue exposure to emerging markets such as China. But my deeper analysis reveals that even following the recent drop, COH share valuation remains escalated. Investor should be cautious about further near term price correction.

In my last article, I ran you through my relative valuation analysis for Tiffany (NYSE:TIF). Here I will use the same financial comparisons to determine a fair stock value for COH, supplemented by a DCF model.

Referring to the charts in my TIF analysis, COH has the highest compounded annual growth rates (CAGR) for both revenue and EPS among the group. COH's 5-year revenue CAGR is ~14.5% compared to the group average of ~10.0%. Its 4-year EPS CAGR is ~10.7% versus the group average of ~7.0%. COH is also the most profitable and liquid firm among its public peers. Its 5-year average EBIT, net, and free cash flow margins are ~33.5%, ~22.2%, and ~22.4% compared to the peer averages of ~22.1%, ~14.2%, and ~12.6%, respectively. Lastly, COH's 5-year average ROE of ~46.0% doubles the group average of ~20.2%.

Then I performed the following relative valuation for COH:

(click to enlarge)Click to enlarge

The fair stock value is calculated by weighting 4 different trailing-price-multiple methodologies. To reflect COH's outperformance relative to the group, I assigned a 20% premium on each of the 4 price multiples. By multiplying the most recent financial metrics by their respective adjusted multiples, I arrived at 4 different valuations. Then I gave EBITDA and earnings multiple approaches heavier weights (30% each), as they are more relevant valuation methods. Finally, the model yields a stock value of ~$60, representing a ~13% downside from the current price level. If using a 30% premium, the stock fair value would increase to ~$64, which is still ~7% below the current price.

I also performed a DCF valuation with the following assumptions:

(click to enlarge)Click to enlarge

The assumptions incorporate the Street's consensus estimates and they yield a stock value of ~$62, a 9% downside.

Based on both relative and absolute valuations, COH's current price appears to be overvalued by ~10%. Investors should be cautious about the heightened valuation.

Charts and exhibits are created by the author. Financial data is sourced from company 10-Q, 10-K, press release, Yahoo Finance, YCharts, Wall Street Journal, Thomson One and Morningstar.

Disclosure: I am long TIF.