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Coach Inc: cash flow valuation

|Includes:Coach, Inc. (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