Coach (COH): A high-quality opportunity at a very reasonable price

By J. Royden Ward, Editor of Cabot Benjamin Graham Value Letter

From Cabot Wealth Advisory 10/24/11

For this Cabot Wealth Advisory, I combined Warren Buffett’s and Benjamin Graham’s criteria for choosing stocks. I looked for stocks with:

1)    Free cash flow more than $20 million–cash needs include dividends, operating expenses, capital improvements, and research.

2)    Net profit margin more than 15%–a good indicator of growth sustainability.

3)    Return on equity more than 15%–a barometer of future appreciation.

4)    Discounted cash flow value higher than current price–Standard & Poor’s is a good source to find discounted cash flow estimates.

5)    Market capitalization more than $1 billion–small companies not allowed.

6)    Standard & Poor’s rating of B+ or better–indicates financial stability and steady growth of earnings and dividends.

7)    Positive earnings growth during the past five years with no deficits–very important to adhere to.

8)    Dividends currently paid–always important and helps your return, too.

I screened my Benjamin Graham Common Stock Database and found two high-quality companies that fit my criteria. Both companies are leaders in the retail store sector, and both have excellent future prospects.

Coach (COH) is a designer, maker and marketer of high-quality leather goods for men and women. Products are sold in department stores, specialty shops and the company’s own Coach stores. Coach expects to expand its retail space by 12% during the next 12 months including opening 30 new stores in China.

COH’s stock price slipped in August due to weak quarterly earnings brought about by store closings in Japan and higher raw material prices. Conditions have improved in Japan, and raw material prices should abate in 2012.

We expect sales and EPS growth of 15% during the next 12 months and beyond. Coach’s stock price has partially recovered from its August swoon, but continues to stand out as a high-quality opportunity at a very reasonable price. The current dividend provides an attractive 1.5% yield.


Roy WardJ. Royden Ward
Editor of Cabot Benjamin Graham Value Letter
 
A lifelong investment professional, J. Royden Ward applies his 40 years of investment research, portfolio management, writing and publishing experience to his role as analyst and editor of Cabot Benjamin Graham Value Letter, which is directed to long-term investors seeking a guide to profitable value investing based on the time-tested systems originally developed by Benjamin Graham, the Father of Value Investing. A second-generation disciple of Benjamin Graham, Roy in 1969 pioneered the development of a computerized model that applied the formulas developed by Graham using a unique ranking system. Today, Roy applies his system to two models in the Value Letter.