Coach Shares Are Upgraded to 'Buy'

BOSTON (TheStreet) -- TheStreet.com's stock-rating model upgraded Coach(COH Quote), a luxury handbag and accessory retailer, to "buy."

The numbers: The company's fiscal first-quarter net income fell 3% to $141 million, or 44 cents a share. Revenue grew 1% to $761 million. Coach's gross margin declined from 78% to 72% and its operating margin fell from 31% to 29%. The company has an ideal financial position, with $995 million of cash and just $25 million of debt. A quick ratio of 2.1 confirms Coach's fiscal prudence. We give the company a financial strength score of 8.9 out of 10, higher than the "buy"-list average of 7.

The stock: Coach has risen 63% in 2009 and 66% during the past year, outperforming major U.S. benchmarks. The stock trades at a trailing price-to-earnings ratio of 17, a discount to the market and luxury goods makers. Its projected price-to-earnings ratio of 16 represents a 21% discount to the industry average. However, its shares are remarkably volatile, with a beta of 1.8. The stock pays a 0.8% dividend yield, less than the S&P 500 average of 2.8%.

The outlook: Coach could be vulnerable if consumers reduce spending or if its products fall out of fashion. However, its quarterly sales growth suggests the worst is over. The company managed to maintain, and perhaps bolster, its brand power during the recession. Elevated unemployment could damp spending, threatening the retail industry, but Coach is less exposed than its mid-range peers. Jewelry retailer Tiffany(TIF Quote) offers comparable exposure to the high-end U.S. retail market, but its stock is more expensive than peers' based on trailing and projected earnings.

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