It is a stark contrast from the 46% losses it achieved in 2015, but even with the recent gains, KORS stock is still down 37% since the start of 2014. While stock performance does not necessarily indicate value, KORS is a stock whose best days are still yet to come.
The closest competitors to Michael Kors are Coach (COH) and Vera Bradley (VRA). These three companies operate in the high-end, fashion handbag/accessory space, with each company’s performance always compared to the other’s. Therefore, investors can learn a lot by comparing both the valuation and operating performance of these three companies when trying to identify investment value.
Click to Enlarge Based solely on the chart, investors can conclude that Michael Kors is the inferior company to Vera Bradley and Coach.
The chart also illustrates that sentiment for this industry has been negative, with P/E multiples falling over the last two years.
However, it is worth noting that earning multiples for all three stocks have jumped in the last three months, with strong earnings driving each stock higher. Thus, investor sentiment is most certainly shifting higher for the industry as a whole, which bodes well for whichever stock proves to be best-in-class.
Which Stock Should You Buy?
Theoretically, the company with superior growth should trade with the highest stock multiples. If so, then KORS stock is significantly undervalued.
Click to Enlarge For the coming fiscal year, KORS is expected to grow revenue 4% to $4.85 billion. Meanwhile, Coach is expected to grow 3.8% and Vera Bradley will grow 2.2%.
This suggests that, at the very least, KORS is worth just as much as its competitors COH and VRA. However, Michael Kors’ growth for the coming year does not tell the entire story. You must also consider the past to some degree.
Clearly, KORS’s 4% growth in the coming year is much more impressive than Coach’s 3.8% growth, because of the comparable year(s). This is a company that has grown so fast and so quickly, and while both VRA and COH have fallen in stock value due to their growth struggles, KORS stock woes have been for a completely different reason.
That reason is the sudden slowed growth from 20%-plus annually to mid-single digit, and the realization that many of KORS’s markets have matured. That does not make KORS a bad investment or company, it makes Michael Kors a different kind of company where buybacks, above GDP-growth and eventually dividends will become catalysts.
How High Can Michael Kors Stock Go?
Nevertheless, if one thing is clear, it’s that KORS stock has fallen too fast and too much.
At the very least, KORS stock is worth the same 18.5 times next year’s earnings per share multiple of VRA, and a strong case can be made that it is worth more. Given that Michael Kors’s last quarter has caused a shift in sentiment, and the stock has continued to trade higher even after its large post-earnings intraday gains, there is a strong likelihood that it will appreciate until reaching a stock multiple that is similar to its two competitors.
Therefore, if KORS stock can support 18 times forward earnings, it would mean upside of at least 50%, or a stock price of $77.50. Given the likelihood of this playing out, Michael Kors is finally looking like a great investment opportunity.
As of this writing, Brian Nichols was long shares of KORS.