Coach (COH) Maintains Quality, Has Dividend Yield and Trades Relatively Inexpensively

March 8, 2013

Coach (COH) trades in the lower range of its historical valuation range and has a dividend yield. Marian Kessler, Portfolio Manager and Equity Research Analyst Becker Capital Management, expects this fine-accessories marketer to overcome seemingly short-term mishaps and includes COH in her high-quality, value investment portfolio.

Coach, which has traditionally been a beloved growth name selling at a premium valuation multiple to the market and often to the retailers in general is one. Coach had a series of missteps, which we think are short-term in nature. Following a difficult fourth quarter, the stock is now trading at about 13 times earnings and an enterprise value of EBITDA of 8.5 times, which is in the lower quartile of its valuation range over the last 10 years. It has a decent dividend yield at 2.5%,” Kessler said.

Kessler says stock performance in the market has recently been heavily macro-driven, and she says much of the volatility can be attributed to the global crisis, fears about the European Union and the euro, and other headline risks. Kessler takes advantage of volatility, she says, and uses four primary criteria to dispassionately select stocks like COH.

“We buy stocks that meet four primary criteria. The stocks must be out of favor, as measured by sentiment or trading range, and they must be good-quality companies. We do not buy turnarounds and are not contrarian investors. We don’t buy distressed or speculative issues. We buy stocks that are trading at attractive valuations either to their historic norms — relative value — or stocks trading at a valuation discount to the market as a whole, otherwise coined an absolute value. The fourth criteria for inclusion in a Becker portfolio is that a company has to have a stable-to-improving roadmap in the future. For us, it’s not enough to buy a cheap stock. We want to buy good-quality companies with good growth prospects, but at valuation discounts,” Kessler said.