Vitaly Losev
1
All posts from Vitaly Losev
Vitaly Losev in OneTwoThree,

Several reasons Michael Kors (KORS) could double investments.

Michael Kors is a rapidly growing global luxury lifestyle brand led by in tandem designers and managers. Since launching his namesake brand over 30 years ago, Michael Kors has featured distinctive designs, materials and craftsmanship with a jet-set aesthetic that combines stylish elegance and a sporty attitude.

Mr. Kors’ vision has taken Company from its beginnings as an American luxury sportswear house to a global accessories, footwear and apparel company with a presence in over 95 countries.




1) Indcators analisys

Michael Kors has lost a little over 40 percent of its capitalization is only in the last year. The company is losing ground, slowing growth rates, falling revenues, the brand loses appeal among consumers. Is the way to to explain such a rapid drop in prices. But whether all this is true?

First of all, I would like to compare the performance of the company a year after the IPO (by the way, which took place rather recently - in late 2011). So the end of 2012, revenue 1.3B, equity 456,24M, EPS 0,80. With such indicators of the company was estimated at around 7.5 billion. This corresponded to index P / E at 27. However it was not symbolic, but now the company is valued by the market once all the same amount of about 7.5 billion. What has changed during this time in numbers. Revenue rose almost 4-fold to 4,371 M. Equity grew approximately at the same rate and now stands at 2,240. EPS is 4.28 USD per share. Thus, wall street estimates Michael Kors Inc, as well as 4 years ago, ignoring the tremendous growth in key financial indicators. The ratio of P / E of today is only 9.3.



Another strong argument in favor of the long position is the absence of debt. This is a rare case where the company has zero debt, both short-term and long-term.

Of course, such a low price is a concern and you want to find a trick. And perhaps it is. Companies operating in the fashion industry is particularly sensitive to trends, so changes are happening faster than in other industries. The most sure way to understand how to change the demand, it is to pay attention to retail sales data points.



The graph shows that the growth of retail sales began to fall from the end of 2014 and still shows no trend to recovery. However, even though the North American segment (89% of sales) is the largest contributor to Kors' revenues, Japan (1%) takes the lead in terms of revenue growth and earnings from the country were 119% higher than the year earlier. North America and Europe (10%), in comparison, grew 64% and 103% respectively during the year. The company did not realize the potential of both the european, and especially asian markets. These regions contributed 36% and 10% respectively to the global luxury goods market, but only 10% and 1% to Kors' revenues This gives us reason to believe that MK has the potential for continued rapid growth.

2) News backgroundShare Buybacks: During the 2nd quarter of fiscal 2016, as reported on 11/4/15, KORS used $400 M to repurchase shares outstanding at an average price of $42.44, near the current stock price which is trading at a 10 P/E. In the 1st quarter of fiscal 2016, the company used $350 M to repurchase 6.96 M shares at an average price of $50.28, for a total of $750 M used on share repurchases in the first half of fiscal 2016. Over the past 12 months, the company used $1.2 B to repurchase shares outstanding, 15% of the current market cap. On 11/3/15, the company increased their share repurchased plan by $500 M, allowing it to use another $758 M to purchase more shares. The currently depressed stock price allows more shares to be repurchased with the same amount of money, increasing the impact of the share repurchase program.

Sustainability of Share Buybacks:Let's take a look at the balance sheet to determinate the sustainability of the share buyback program. The company currently has $432 M of cash on-hand. As an investor, I would be comfortable with the addition of $1.2 B of long-term debt to the balance sheet, about half of total assets. The company is also generating about $600 M of excess cash per year ($840 M in net income plus $160 M of depreciation less $400 M of cap ex). KORS should be able to use $2.4 B for share repurchases over the next two years, or about 30% of the current market cap. Given the balance sheet strength and low interest rates, this would be a wise move to maximize shareholder return. Given the likely continuation of share repurchases over the coming years, I expect the stock price to double within the next three years.

3) Technical analysis


Historically, MK is now at the lowest price levels since the very first correction three years ago. Thus the resistance level of around $ 38 had never been broken, and there is no compelling reason to believe that this will happen. As a result, technically the way up and the price breaks of several month's trendline is most likely. Also, do not neglect the stop order. Place it below the support level in the area of $ 36, we will limit risks only by 7%.

4) Conclusion

Lack of debt, a low P / E, and the potential for expansion in the markets of Europe and Asia paint already profitable and growing company. Thus, the arguments to purchase. Michael Kors Holdings looks like a model example of an investment, just like Graham taught. The only caveat is the lack of dividends that would have once again demonstrated the company's ability to earn money, and would not have made the paper more attractive to institutional investors.

So, we really stand a chance in the growth of 100-120%. Such opportunities market gives really rare.