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Take The High (End) Road

|Includes: KORS, TIF, Tapestry, Inc. (TPR)
Take the High (End) Road

Courtesy of Paul Price

Tiffany (NYSE:TIF), Coach (COH) and Michael Kors (NYSE:KORS) are major players in the luxury segment of retailing. KORS has only been publicly traded since December of 2011. TIF and COH have long, very successful track records.

You might expect that the performance of these three stocks would parallel each other. In fact, the present valuations are widely disparate. For smart shoppers, this may spell opportunity.

Comparing these companies is complicated because they each use different fiscal years. Tiffany's FY ends around Jan. 31 of the following year. Coach closes its books on the Saturday nearest June 30. Kors totals up near March 31 of the next calendar year. For clarity in this discussion, I'm going to use my best guess in making apples-to-apples comparisons for the 12-month period ended around January 31, 2013.

As of Jan. 31, 2013, Tiffany had earned about $3.25 per share, Coach's EPS were about $3.62 and KORS came in at around $1.83 per share. Market pricing placed their current valuations as follows…

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Traders are paying up for KORS while getting no dividends. Investors are shunning Coach even though it has a modest multiple and a decent yield. TIF falls between those two extremes. The long-term results from the two companies which have been trading long enough to have them suggests that investors have gotten things mixed up.

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Coach shareholders benefited from the huge profit surge.

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It seems odd that today's investors prefer TIF to COH and award it a 54% higher P/E. Michael Kors premium valuation is easier to understand. KORS' pro forma EPS were $0.40 in fiscal 2010. Profits almost doubled to $0.78 in 2011. Earnings are expected to be $1.86 when FY 2012 is reported for the period ending March 30, 2013. A further 59% increase is now forecast for FY 2013.

True believers in KORS feel the shares are not overpriced at 23.1x next year's projection of $2.45 per share. Bargain seekers should logically be more attracted to Coach than Tiffany & Co.

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The only time Coach traded cheaper than today, valuation wise, was near the exact nadir in 2009. It paid no dividend back then. Shareholders were about to embark on an almost 600%, three-year move up. Today's 2.4% yield is unprecedented. The trailing P/E of 13.8x is a lower starting point than those that launched huge rallies in 2003, 2006, 2010 and 2011.

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All three of these companies are financially sound and highly profitable. Michael Kors is the fastest grower of the three companies but that fact is already reflected in its lofty valuation. Tiffany had a down 2012, yet is priced for growth. Coach had an all-time record fiscal year but is currently out of favor.

I bought both TIF and COH last summer when they sold off. I'm satisfied with my Tiffany gain and am planning to let TIF go via covered calls that expire on April 19. If Coach remains around $49 - $50, I'll be using those proceeds to increase my position.

A lower than historically typical P/E on the FY 2014 consensus projection of $4.14 could support a 12-month target price of $65 - $75. That's 30% - 50% above the current quote yet lower than was actually achieved early in 2012.

Paul's Disclosure: Long COH, Long TIF, short TIF covered calls.