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Are These Luxury Companies Trading at a Value Price?
Tuesday, August 8th, 2017



Michael Kors (KORS): Buy

The company is looking to expand its footprint after its recent purchase of Jimmy Choo. This could help increase lackluster sales. They have fallen by 4.6% over the last 12 months and EPS has fallen by 26.8% during the same time frame. Much of the EPS fall can be attributed to accounting for future store closures. While growth has been a concern the valuation ratios are a major strength. The current P/E of 11.2 is well below the industry average of 29.1, Price/Sales of 1.3 is below the industry average of 1.4, Price/Tangible Book Value of 5.4 is below the industry average of 14.8, and Price/Cash Flow of 7.3 is below the industry average of 13.4. The company also has a great balance sheet with plenty of liquidity. There is a current ratio of 2.06 and Debt/Equity is just 8.36%. Looking out to March 2019, estimated GAAP EPS of $3.78 would give me a target sell price of $62.37.

Nordstrom (JWN): Hold

The company sells many great brands through its Nordstrom and Nordstrom Rack stores. The stock price is well off its 52week high of $62.82 as concerns over Amazon and reduced mall traffic have concerned investors. Even with these concerns, sales have grown by 2.7% over the last 12 months. EPS has not fared as well, as it has fallen 23.2% during the same time frame. This could be a result of nonrecurring accounting events. With JWN, investors get a nice dividend yield of 3.05%. Price/Sales of 0.54 looks attractive compared to an industry average of 0.89 and Price/Cash Flow of 7.89 looks good compared to the industry average of 8.28. The balance sheet looks concerning as the Debt/Equity of 405% appears to be very high. I felt better about this problem when I noticed the company has a credit business which affects the accounting of the company. Looking out to January 2019, estimated EPS of $3.09 gives me a target sell price of $50.99.

L Brands (LB): Hold

The company has the wellestablished store names of Victoria’s Secret and Bath & Body Works. The company pays a great dividend of 5.3% and it uses a reasonable amount of earnings to pay it out with a dividend payout ratio of 62.7%. The current P/E of 12.1 looks attractive compared to the industry average of 18.8 and Price/Cash Flow of 7.99 is favorable compared to the industry average of 8.28. One major concern is the company has equity of negative $836 million and debt of $5.7 billion. If I look forward to January 2019, estimated GAAP EPS of $3.36 would generate a target sell price of $55.44

Coach (COH): Sell

Coach has a very strong balance sheet with a debt/equity of just 20.5% and a current ratio of 4.35. Sales have grown by 3.9% over the last 12 months and EPS has increased 31.8% during the same time frame. Coach has a strong profit margin of 11.55% which has helped generate a great ROE of 18.88 over the last 12 months. Investors also get a nice dividend of 2.77%. This company has many positives, but the concerns lie within the valuations. The current P/E of 26.36 is below the industry average of 29.1, but is more than I like to pay for a dollar of earnings. Price/Sales of 3.04 is more than double the industry average of 1.38 and Price/Cash Flow of 18.92 is well above the industry average of 13.36. Looking out to June 2018 estimated GAAP EPS of $2.46 gives me a target sell price of $40.59.

Ferrari (RACE): SELL

The company has done a great job growing sales and EPS over the last 12 months. Sales have grown by 11.74% and EPS saw an increase of 47.8% during that time frame. The balance sheet looks concerning as Debt/Equity of 393% is very high, but much of this can be accounted for in the leasing and financing division of the company. Since it is a luxury car brand the profit margin of 13.7% is well above the industry average of 3.5%, but inventory turnover of 5.0 is less than half the industry average of 10.89. The valuation ratios are a major concern as the current P/E of 38.3 is well above the industry average of 14.1, Price/Sales of 5.23 is far ahead of the industry average of 0.49, Price/Cash Flow of 24.2 is more than 5 times the industry average of 4.69, and Price/Tangible Book Value is not material since the company does not have tangible equity. Looking forward to December 2018, estimated GAAP EPS of $3.18 gives me a target sell price of $52.47.

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