Back on June 29^th, 2009 I recommended everyone to buy Coach (COH) at around $25.50 per share with a 12-month expectation of $33. Well since then Coach has soared nearly 32% surpassing my 12-month target. In this case, most people would say sell, I say the opposite and want to buy more. After reevaluating Coach and its long-term growth prospects I now believe it is worth more than $43 per share and this is why:

Strength

What I like about Coach is there a winning brand. Throughout time they have been successful posting profitable quarter after profitable quarter. They even managed to prevail through the recession as consumers chose Coaches products over expensive European Brands with $2k+ price tags. I see this as a winning strategy as Coach has a unique ability to pose themselves as a luxury brand yet still appeal to value-focused shoppers. In the last quarter, we saw Coach’s handbags that are $300 or under rise 57%. Adding to this Coach is expanding globally. With the evolution of the Coach stores, they are gaining market share especially with their vast international expansion in Japan and China. Coach is opening 50 stores worldwide in the next five years. I see this international expansion supporting their global growth and strengthening the brand.

Value

Strong points about Coach are its excellent ability to post a return of over 100% on their capital. Adding to this, they manage a 10% earnings yield. Adding to this Coach has only $25 million in debt giving them flexibility to expand. As a business they are very efficient as you can tell by their 23% free cash flow margin. With a P/E of 15 and a PEG of 1.1 these are also strong numbers adding value. I believe the true strength in Coach’s brand will be seen in 2010 when consumer spending picks up pace and the economy starts to see more significant signs of recovery.

Growth

As of right now, Coach’s true growth potential and revenue growth is being limited by the recession. Contrary to this though they still have had an impressive revenue stream despite the fall down in consumer spending. The company has been successful in cutting unnecessary costs, results that will only benefit them long-term. Over the next five years, analysts expect Coach’s sales growth estimates to increase year by year. With a steady stream of new handbags expected to release in December, 4^th quarter sales should jump significantly. Adding to this is the 9% store expansion in new markets.

Overall

All in all, Coach is a fundamental sound value-growth company that will benefit even more from a recovery in the economy. I would suggest trying and to buy Coach on a dip. Watch the support levels to see where is a good entering point. Overall my 12-month target has now been raised to $43.

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