In this report regarding to the investment in the stock of the company will focus on the overriding factors in the overvaluation of the shares of this company. The DCF analysis will shows that the fair price will be $41, but the market will shows the price of $58. This shows that the market will offer more for the securities. This argument is the basis for our argument of selling the stocks of the company. The share price of the company will decrease from .
73 to $58.58 in period December 2012 to May 2013 (yahoo Finance, 2013). This decrease in the share prices is due to the internal deficiencies of the organization. The EPS of the company shows the continuous increasing trend in the last decade.
This will be the positive point for investors to purchase the securities of this company. While, the P/E ratio of the company in the last four years shows the miscellaneous trend and is decreased in 2013 with respect to 2012. The free cash flow of the company shows the sustainable constant growth of 4%.
This rate is constant due to the increase in the competition in the market along with the changes in the trends of the people. Coach Company is performing in the exceptionally high competitive market with Competitors like, Gucci, Prada and etc. These competitors are experiencing a high growth in the market and enjoy a large market share due to their competitive edge in the market. The company performance in last few years shows a enormous potential of the company till 2012, but with the start of 2013.
The decline in the P/E ratio of the company also shows that the company performance will not be better in the next few years, and hence it is better to sell the stock of this company. Valuation:
This report regarding to the Coach Company dealing in the leather products and hand bags is entirely focused on the company’s financial statements. The future predictions according to the future cash flows of the company are based upon the historical information of the company records. There are different models that are used by organizations like, dividend discount model, discounted residual income, discounted cash flow approach. Along with these different models, discounting cash flow model approach will be used in the valuation of the data of the company and for adoption of predictions into the analysis of this company. This model is based upon the calculation of WACC. We use the beta 1.61 for the calculation of WACC, which is 13%. Business Description:
The company starts its life in Manhattan in 1941 as a family run workshop. This company is performing in the leather industry and mostly dealing in the ladies handbags along with the luggage and wallet briefcase and etc. The company always maintains a high level of standards regarding material usage and the products and is the main reason of the expansion of the market share of the company. Coach Company also takes the help of licensing in its market expansion and sells office furniture, footwear and watches with the help of its licensed partners. Coach always focuses on the continual improvement and anticipation of the consumer demands. This continual department along with the increased focus on the consumer demands makes its image in the U.S market. The company uses the direct marketing approach to reach their customers. According to report on June 30, 2012, the coach company is operated in the 354 retail stores along with 169 factory leased stores in North America (BloomBerg, 2013). Keys Success Factors of the company:
The success of the company is dependent upon some factors. These factors are called key success factors of the organization. Like any other organization, there are some key success factors of this organization, and these are: A Brand image:
The Coach brand is one of the famous brands of the U.S market. Coach always committed to providing the best quality output in response of the consumer demands. This high perception of consumer demand and continual improvement is the strength of the company. Distribution:
Coach is currently using a multi-dimensional marketing strategy for distribution of their products. The direct selling method used by the company also acts as strength of the company, because it ensures the direct contact of the company with customers and helps it for reacting successfully according to the change in demand and trends. Product line Expansion:
The company is continuously focusing on the changes in trends and adopts these changes in expansion of products to provide a vast quality of products to consumers. The company constantly focuses on upward horizontal and vertical integration in the product line. This increased variety of products by Coach Company is also another key success factor of the company. Industry Overview:
The industry of apparel and accessories is considered to be highly competitive because of the direct involvement of trends associated with the market. The increasing trend of the globalization along with the innovative behavior increases the competition in the market. This market is primarily dominated by the European companies, for example; Gucci, Prada and etc. This change in the trends of the market provides a niche for organizations to serve them effectively and efficiently in the market, and increases the innovation and competition in the market. Nature of competition in the market:
The apparel industry is considered to be highly fragmented industry. This industry is famous for its neck breaking competition, because of more volatility of industry with changing trends in the market. The principal competitive factors are brand image, consumer, quality, price and etc. The changing trends, along with demand in this market always increases the competition in the market and attracts other investors towards this industry (wikinvest, 2007). In this industry, consumer along with competitors is stronger than any other factor of competitive forces. This change in the trends always creates a threat of upwards integration from retailers in the market and reduces the market share in the industry. In this high competition, organizations always run to provide an innovative product in the market and this failure will results in the elimination of the organization from the market. Financial Analysis:
Share Price Valuation: The Company started its life in 1941 and continuously performing in the apparel industry. The recent market price of $58.54 (Yahoo Finance, 2013) and the stock summary of the last 10 years show that there is a subsequent growth in the stock price of the company till the first quarter of the year2012. After which a decline is seen in the stock prices of the company, this situation became much better in the year 2013, and the stock of the company will be moving towards its back position. Along with this increase in the share price of the company in 2013, the cyclic pattern will also reflects in the earning per share, which show an increasing trend from the 1st to last quarter and then decreases and the cycle continuous. If we look at the situation of the EPS of the company then we will find that the company EPS increases from 2.7 to 3.702 in the period of 2008 to 2013 (Y Charts, 2013). Price Earning Valuation:
The price Earnings ratio of the company gradually increases in last few years as the company advances its production process and takes advantage of globalization of production. The summary of the data shows that the price earnings ratio will continually rises from 2008-2011. This represents the company’s effectiveness in the operations in the period of global financial crises. In this period of crises, the P/E increases from 13.30 to 21.90 and after which it reduces to 16.60 (Wells Fargo, 2013). If we compare this declined value with the 2008 stage then this will represents the strength of the company. While, the company earnings are still lower than the industry values, and the company offers the return of 15.82 as compared to 22.97 of industry (CSI Market, 2013). This is the clear representation that the stock of the Coach Company does not provide better results as compared to the market and it is beneficial to sell the stock of the company, because of the possibility of further decrease of earnings in the future. Return on Equity:
The return on equity ratio is one of the most prominent measures of the shareholders regarding the evaluation of the company. The stock performance of the company in this regard shows the miscellaneous trend in the last five years and the ROE of the company declined from 52.50 in 2008 to 36.80 in 2009, after which it increases to 48.80 in 2010 and 54.60 in 2011. Afterwards, in 2012 the ROE will again decrease to 52.10 (Wells Fargo, 2013). This cyclic behavior in the return of the company will clearly defines that the organization having no accurate strategy regarding to the long term growth, and having no proper strategy regarding to the achievement of the growth in the future. Free Cash Flow:
The free cash flow for equity of this company represents the miscellaneous trend in which there are ups and down seen in the graph of the free cash flows of the organization. The current figure of the FCF of this company will be $1.090B (Y Charts, Coach Free Cash Flow TTM, 2013). The valuation also results in an increase in FCFE of the company and is equal to $1266708M. I also used the flat discount rate of the 10% for all the items. This valuation is based upon some of the assumption in which; I mentioned the growth rate of the 13.43% in the earnings of the company, which is greater than industry growth rate of 4.45% (CSI Market, COACH, INC.(COH), 2013). The COGS and the growth rates are also same as the rate of growth and show the overvaluation of the stock. This means that the stock will at its peak level and increases its intrinsic value. This means that the stock will gain its value, and it is beneficial to sell the stock of the company.
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