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Eric Cota
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I'm a value investor for the long term primarily focused on firms in the S&P 500 that produce solid free cash flow and pay dividends. I look for undervalued firms using a discounted cash flow model. I reinvest dividends and track performance on a total return, risk-adjusted basis. Five years... More
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  • Coach Inc: cash flow valuation 0 comments
    Jan 17, 2012 2:31 PM | about stocks: COH
    Current Price: ~ $63/share
    Projected Yield: ~ 1.45%




    Coach is a manufacturer, distributor, and retailer focused on handbags and leather accessories in an assortment of styles. Its products offer the quality of higher luxury brands but at more attractive price points. Although around 60% of sales come from its more than 345 North American retail stores and more than 120 outlet stores, Coach also sells its products through department stores, international shops, the Internet, its catalog, and Coach stores in Japan and China.       


    I estimated the firm's WACC today at 16.48% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:
    Year
    FCF $Millions
    2002
    65
    2003
    165
    2004
    381
    2005
    450
    2006
    463
    2007
    638
    2008
    749
    2009
    569
    2010
    910
    2011
    886

    Average Annual Growth FCF: ~ 44%
    CAGR FCF: ~ 34%
    Consensus Forecast Industry 5-Year Growth: ~ 15% per year
    Consensus Forecast Company 5-Year Growth: ~ 15% per year
    Internal Growth Rate: ~ 36%
    Sustainable Growth Rate: ~ 77%

    Scenario 1
    Starting at $886 million FCF, assuming the company achieves a 5-year growth rate in FCF of 15% per year, and assuming that after the next five years, the company achieves 6% growth in FCF per year forever:

    Discounted Cash Flow Valuation
    Year
    FCF $Millions
    0
    886
    1
    1019
    2
    1172
    3
    1347
    4
    1550
    5
    1782
    Terminal Value
    19559

    The firm's future cash flows, discounted at a WACC of 16.48%, give a present value for the entire firm (Debt + Equity) of $13387 million. If the firm's fair value of debt is estimated at $24 million, then the fair value of the firm's equity could be $13363 million.  $13363 million / 292 million outstanding shares is approximately $46 per share and a 20% margin of safety is $37/share.


    Scenario 2
    All else being equal, assume the company achieves a 5-year growth rate in FCF of 15% per year, then growth in FCF of 9.50% per year forever: :

    Discounted Cash Flow Valuation
    Year
    FCF $Millions
    0
    886
    1
    1019
    2
    1172
    3
    1347
    4
    1550
    5
    1782
    Terminal Value
    29368

    The firm's future cash flows, discounted at a WACC of 16.48%, give a present value for the entire firm (Debt + Equity) of $17962 million. If the firm's fair value of debt is estimated at $24 million, then the fair value of the firm's equity could be $17938 million.  $17938 million / 292 million outstanding shares is approximately $61 per share and a 20% margin of safety is $49/share.


    Sources
    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Stocks: COH
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