TV

Lea Jakobiak
New car registrations in the UK jumped to their highest level in a decade this March. Keith Lewis, Society of Motor Manufacturers and Traders Head of Communications says Brits' favourites are the Ford Fiesta, the Vauxhall Corsa and the Nissan Qashqai.
Article / 08 August 2012 at 11:53 GMT

Coach may be late to China though plenty of benefits still ahead

Matt Bolduc Matt Bolduc
Equity Analyst
Denmark

Luxury and quality product companies and their stocks are often misconstrued for being extremely volatile. Sometimes they are but this is often due to a lack of brand identity. Some sector companies stay strong, almost regardless of the economic climate. This is largely due to the resilience of their brands. Companies with strong brand names are also benefitting from continued emerging market expansion.

One such strong brand is Coach, Inc. (NYSE:COH), an extremely popular brand in the US and Japan with a 36 percent and 17 percent market share in the premium handbag markets there respectively. Apart from market share the company's financials are pristine. Although many investors tend to decry past financial performance, as simply that, it can often show strong branding, management and economic advantages. Chart 1 demonstrates how stable Coach's revenue has been given that it is a luxury brand.

Same store sales and revenue growth

Coach's CEO has been at his post since 1995, and saw the company's spinoff from Sara Lee in 2000, which resulted in EPS growth at an average of 32 percent since then. Almost the entirety of its growth comes from the US and Japan, making its achievements much more impressive given that other luxury companies have become more dependent on emerging markets during these tough economic times in order to sustain growth. At the same time Coach managed to improve its gross and profit margin by 13 percent on the back of its strong brand by following a disciplined growth path.EPS and revenue history

 

History is good but what about the future?
Coach has seen a bit of a slowdown in the last couple of years, with sales growth at around 13 percent and EPS growth of 21 percent - growth rates that most companies would kill for. But Coach still has a trick up its sleeve. The company has very little presence in China with only 6 percent of its sales coming from there, which means Coach has a massive, unpenetrated market to grow into. For some this is a glass-half-empty story, where the company is seen as having simply missed its chance, but as I see it and as Coach sees it this is a glass-half-full opportunity, as China represents a massive market to conquer and there are plenty of benefits still ahead.

The company has now launched an aggressive campaign in China which started in 2010 after acquiring distribution and manufacturing companies in the region. The company expects that China should account for 20 percent of the company's revenues in three to five years, compared to the current 6 percent. Based on my own estimates, the company's expansion into China should contribute 15 percent of sales growth over three years versus its 2012 revenue. This is simply impressive given that the company currently only earns about USD 300 million in revenue from China (out of USD 4.8 billion in total). You can also add to this a further 40 percent growth internationally (excl. Japan) that the company has earned from its other foreign markets. It therefore appears that the sky is truly the limit for Coach.

So how much does this little darling cost? The company's stock took a 16 percent hit from Q4 earnings last week because of its disappointing same stores sales of 2 percent in the US, but has since rebounded to cut this drop by half. Nevertheless, the company is trading at a trailing P/E of around 16, and as a personal rule, any company that constantly grows at a percentage that is higher than its P/E to earnings ratio, is always worth a look.

So in investing in Coach it appears you can expect steady growth, excellent management and great potential at a good price. What more could an investor ask for? It might be a boring investment for thrill seekers, but could be great for wise investors.

Disclaimer

The Saxo Bank Group provides an execution-only service and all information provided on Tradingfloor.com is solely for general information. When trading through Tradingfloor.com your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. Tradingfloor.com does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. Saxo Bank Group will not be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available as part of the Tradingfloor.com or as a result of the use of the Tradingfloor.com. Any information which could be construed as investment research has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such should be considered as a marketing communication. Furthermore it is not subject to any prohibition on dealing ahead of the dissemination of investment research. Please read our disclaimers:
- Notification on Non-Independent Investment Research
- Full disclaimer

Show latest activity
Dismiss
Sorry, there was a problem communicating with the TradingFloor.com servers. We are working hard to solve this. Please try again later.
Oops! There was a problem communicating with the OpenAPI Portfolio service.
Oops! There was a problem communicating with the OpenAPI History service.
Oops! There was a problem communicating with the OpenAPI Reference service.
Oops! There was a problem communicating with the OpenAPI Root service.
Oops! There was a problem communicating with the OpenAPI Trading service.
Sorry, there was a problem communicating with the Financial Calender servers. We are working hard to solve this. Please try again later.
Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail