Saxo Bank (Saxo Bank)
World markets  |  November 27, 2012 10:51:51

Coach and Starbucks: at least one is a poorly rated

What do Starbucks (NASDAQ: SBUX) and Coach (NYSE: COH) have in common? At first glance, that, except for loyal customers, not much. Each company operates in a sector - one sells coffee, the other handbags.

Why do these companies have taken?

The example companies Coach and Starbucks is beautiful to see how fast the valuation investors can get out of control.   Financial indicators show if the company Caoch better growth than those of Starbaksu.    However, the valuation based on the ratio of price to free cash flow Starbucks masterfully leads. And despite the fact that the main source of growth of both companies - net disposable income - is   very similar. Historical performance of companies is not a good indicator of future performance, but companies with strong income statement are simply strong company.

Both companies are quite successful in the past. In the past 10 years, annual sales of Starbucks grew by an average of 15%, at Coache it was 21%. Net profit grew when Starbucks by 20% and 28% Coach. A pointer Starbucks EPS grew by 21%, and Coach even by 31%. These are   excellent numbers!

Because of small businesses and has good growth can be expected. Be sure to look at them, I can imagine growing faster than overall GDP growth, as strong growth in the past may mean an advantage over the competition.

For both companies, the annual cash flow run into the billions, but their ranking is, whether based on P / E, or free cash flow, a lot different. Starbucks is more than three times more expensive than Coach.

It may of course be due to better prospects Starbucks. Either this, or one of the companies is poorly appreciated. Especially when the Coach with higher growth, better performance and more stable financial results cheaper.

Currently 86% of revenue comes from Coach USA and Japan. Markets fashion accessories grew by about 10%, which is still a decent number. Starbucks generates 76% of sales in the U.S.. Firms thus "conquered" their home markets, and therefore focus primarily on China.This will affect the rate of growth in both the short and long term.

Starbucks will grow so much faster than Coach, in order to justify its high valuation? Maybe, but common sense tells me that the price is too high if we take into account the fact that companies are similar in the historical growth and expansion into related areas and possibilities of management.

Cashflow is more important than profits

Investors often focus on P / E, but gains are not the best way to evaluate a business. A better way is because the ability to generate cash. Starbucks does have a 40% higher net profit, but in terms of free cash flow, which is important for investment, Coach is able to profit from one dollar to create more cash.In the last ten years it has been about 2% more than Starbucks, which may sound like a small amount. Over the decades, however, this number will grow much more.

If we compare Starbucks to Coach evaluation based on free cash flow, we get 230% bonus. UP / E valuation we get 170% bonus. I expect that you will doubt the award of one or both of the companies.

So Starbucks is justifiably twice, or three times more expensive than Coach? I think not. According to the above mentioned reasons Starbucks is overpriced and Coach underrated. How would this information were traded?

Conclusion: if Starbucks is properly valued, then it is very likely that Coach is undervalued, so buy it. However, if properly evaluated Coach, then from Starbucks hold on, or better yet, sell it.

Matt Bolduc, equity analyst at Saxo Bank

 Globální online investiční banka

Saxo Bank je globální investiční banka specializující se na online obchodování a investice na mezinárodních finančních trzích. Saxo Bank umožňuje soukromým investorům a institucionálním klientům obchodovat s FX, CFD, cennými papíry, futures, opcemi a dalšími deriváty a poskytuje i profesionální správu portfolia a fondů díky svým online obchodním platformám oceněným řadou různých ocenění.

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