Coach, Inc. (COH) continues to post impressive results as it grows not only in China but in North America too. The company recently reported its 9th consecutive positive earnings surprise driven by a 15% increase in sales.
Analysts raised their estimates for both 2012 and 2013 off the strong quarter, sending the stock to a Zacks #2 Rank (Buy).
Coach also pays a dividend that yields a solid 1.5%, which it has been aggressively raising over the last two years. Valuation is reasonable too, with shares sporting a PEG ratio of 1.1.
Company Description
Coach manufactures and sells high-quality handbags and leather accessories. Coach is a well-recognized brand in North America and Japan, and it is surging in China.
The company is headquartered in New York City and has a market cap of $17.4 billion.
First Quarter Results
Coach delivered another quarter of excellent performance on October 25. Earnings per share came in at 73 cents, beating the Zacks Consensus Estimate of 70 cents. It was a 16% increase over the same quarter in 2010.
Sales rose 15% to $1.050 billion, ahead of the Zacks Consensus Estimate of $1.022 billion. Same-store sales were up an impressive 9.2% in North America and rose at a “double-digit rate” in China.
Gross profit declined, however, from 74.2% to 72.8% due to rising input costs. Meanwhile, operating income grew 13% year-over-year as the company’s operating margin was a remarkably high 30.7%.
Estimates Rising
Following better than expected first quarter results, analysts raised their estimates for both 2012 and 2013, sending the stock to a Zacks #2 Rank (Buy).
As you can see in the company’s Price & Consensus chart, estimates have been consistently rising over the last several months as Coach has delivered 9 consecutive positive earnings surprises:
Based on consensus estimates, analysts expect 18% EPS growth this year and 16% growth next year.
Dividend Rising
In addition to strong growth, Coach pays a dividend that yields a solid 1.5%. The company raised it by 50% earlier in the year on top of a 100% increase last year.
With strong cash flow and almost no debt, expect more dividend hikes in the future.
Reasonable Valuation
The valuation picture looks reasonable for COH. Shares trade at 16.3x 12-month forward earnings, a slight premium to the industry average of 15.0x, but a discount to its 10-year median of 21.3x.
Its PEG ratio is a reasonable 1.1 based on a 5-year EPS growth rate of 14.5%.
The Bottom Line
With solid earnings momentum, strong growth prospects, a rising dividend and reasonable valuation, Coach offers investors plenty of upside potential.
Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.
