Description:

Coach is a classic compounder, not to be confused with certain pyramid schemes, selling magic weight loss potions and masquerading as growth stories. From 2002 to 2012, the company's sales increased at a compound annual rate of 21.1%, while earnings per share grew 31.1%. However, in the past year, shares have slid 35.4% while the S&P 500 has generated a 13.4% total return, providing investors with a rare opportunity to own a high quality business at a significant discount to intrinsic value. Coach currently trades at 8.3x EBIT, 13.0x current and 11.7x forward earnings. In other words, the stock is priced as if Coach’s growth is long in its past. At its peak in 2001, shares fetched 32 times earnings. If we assume that Coach ultimately trades back towards its average forward multiple of 15x over the next three years, we estimate the stock is worth $76.60 in our base case, which represents more than 50% upside potential. In our bull case, upside is significantly greater.