Many of our readers know that we like covering stocks that have fallen out of favor with Wall Street. These stocks often have lowered expectations,b&b Michael Kors and positive news can send shares sharply upward. In the case of Michael Kors (NYSE:KORS), we think investors who have sold the stock have written it off far too early. Not only do we believe the valuation is compelling compared to its peers, but we also believe management’s commentary demonstrates confidence that the company’s growth prospects remain bright into the foreseeable future.
Of the three companies, Michael Kors has the lowest forward PE, b&b Michael Kors but it is expected to grow revenue at a significantly faster pace than Ralph Lauren or Coach. Some investors may argue that simply comparing the PE ratios is a bit misleading given that Coach is experiencing significant revenue declines this year, and this is making its earnings look smaller than they have been in the past. We would respond to such criticisms with two observations. First, even if we gave Coach the benefit of the doubt and calculated its PE ratio based on its 2013 earnings of 3.73 (its best EPS year), the stock would have a PE of 11.1 ($41.43/3.73 = 11.1). This is barely cheaper than Michael Kors shares, and Kors is expected to grow revenues a whopping 9.4 times faster than Coach next year. Secondly, we would point out that while Michael Kors is 24% more expensive on a price/sales basis than Coach, Coach is only exhibiting a fraction of the revenue growth that Michael Kors is.
Michael Kors (NYSE:KORS) is due to report earnings on Monday before the market opens.b&b Michael Kors Consensus expects EPS of $0.81 (+32% y/y) on $851m (+33% y/y) in revenue, which is on the high-end of management guidance of $840-850m in revenue and $0.78-0.80 EPS. Over the past three months, KORS has been down 10% compared with +3% of the S&P. The market is clearly concerned about a potential sales and earnings downside, and a soft guidance. However, I am still a buyer of the name because of its strong position in the accessories and handbag segment, coupled with a positive global growth profile. While I do not expect a “beat and raise” quarter, I see any pullback following the print a good buying opportunity. Reiterate my bullish view ahead of the Q. (Please see my initiation: Michael Kors: Building A Fashion Empire)