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Michael Kors Holdings (NYSE:KORS) sells branded apparel for men and women as well as branded accessories. It has enjoyed enviable growth. Unfortunately, it has been bid up 90% to very high valuation multiples, well above its large cap peers which have only appreciated by about 20% year-to-date. When compared to its peers, it is readily apparent that investors should stay away from KORS shares at current price levels. This stock's high price multiples should dissuade investors from buying at current prices until its valuations descend closer to those of its peers.

Growth vs. Value

As human beings we love compelling growth stories. The Michael Kors growth story is about the rise of the affluent in China, a very interesting and popular macroeconomic phenomenon. Unfortunately, stories like this one sometimes increase stock multiples beyond reasonable levels.

Regardless of how shiny a stock is, investors should never buy a stock because the company is fancy, disruptive, or fun to read about. Instead, investors should be focused on growing the value of their assets. Stories, drama, the next big thing, and other distractors cannot justify paying one dollar for fifty cents.

Instead, investors should buy stocks trading at prices which make them good deals. A poor company trading at a dismal price may be an excellent trade. Michael Kors Holdings shares are trading at the other extreme: Michael Kors Holdings is a great company trading at overly enthusiastic valuations which should be avoided. Its metrics are provided with other large cap apparel stores:

Ticker

Company

P/E

Earnings Growth Est.

P/S

Sales Growth Est.

KORS

Michael Kors

62.3

28.5%

7.3

43.9%

GPS

Gap

20.6

10.5%

1.2

-1.8%

LTD

Limited Brands

20.5

14.5%

1.4

-0.6%

ROST

Ross Stores

19.2

12.9%

1.5

9.1%

JWN

Nordstrom

18.3

12.4%

1.0

4.7%

Future valuation multiples of a company can be modeled over time by utilizing expected growth and trailing valuation multiples for KORS and peer stocks. Graphs of future price-to-earnings and price-to-sales ratios based on analyst earning growth estimates and historical sales growth follow:

(click to enlarge)Forward PE

(click to enlarge)Forward PS

The projected crossover dates span well into the future which demonstrate how KORS shares are overpriced. Even assuming that long term analyst growth rates will continue indefinitely (which is itself ridiculous) it would take eight consecutive years of sustained, phenomenal earnings growth for Michael Kors Holdings' current price-to-earnings ratio to be equivalent to that of its large cap peers.

These projections illustrate the absurdity of current valuations for KORS. Analyst estimates for faster-than-economic growth are not predictive more than three or so years, yet somehow investors are paying prices for KORS which imply they can see the distant future. Investors are more likely overenthusiastic than psychic.

Estimated convergence years were calculated below for KORS:

KORS Peer

P/E Equivalence

P/S Equivalence

Gap

N/A

2015

Limited Brands

2020

2015

Ross Stores

2020

2016

Nordstrom

2020

2017

Investors should avoid Michael Kors at current prices. Instead, they should consider other large cap apparel stores as more reasonable alternatives since their relative valuations do not require the absurdity of almost a decade of sustained, phenomenal growth. In particular, Nordstrom is reasonably priced, especially when contrasted Michael Kors.

Please read the article disclaimer.

Source: Michael Kors' Valuation Premium Over Peers: Justified Or Over-The-Top?