A Coach Follow-Up After a Strong 2Q Report

Last week I mentioned luxury products maker Coach (COH) as a badly beaten down consumer discretionary play that I thought was looking awfully cheap after a 30 percent correction. The company reported an excellent quarter this morning (EPS of 31 cents, 2 cents ahead of estimates) and issued 2007 guidance of at least $1.55 per share, representing growth of 22% year-over-year.

Where does this put fair value for the stock, which was at $25+ a week ago and now is fetching north of $29 in pre-market trading? I think more upside is ahead. Since Coach’s fiscal year ends in June, investors should adjust the company’s profit guidance to a calendar year projection. That puts 2006 EPS at $1.41, followed by $1.69 in 2007.

In a strong bull market, companies growing at 20%-plus can garner price-earnings ratios of 30 fairly easily. In this market environment though, that is a pretty aggressive assumption. I think COH shares should be valued at no less than 25 times earnings, but with a lot of people jittery about the consumer discretionary sector right now, we can use a valuation range of 20-25 times earnings to be overly conservative.

If we use a 25 P/E on 2006 numbers and a 20 P/E on 2007 projections, fair value on Coach shares is in the $34-$35 area. So, even after a 15% gain since last week, we still have some room for further upside in the stock.