Earnings

Comparing NIKE, Inc. (NKE) and Coach, Inc. (COH)

Coach, Inc. (NYSE:COH), on the other hand, is up 12.56% year to date as of 10/12/2017. It currently trades at $39.42 and has returned -0.98% during the past week.

NIKE, Inc. (NYSE:NKE) and Coach, Inc. (NYSE:COH) are the two most active stocks in the Textile – Apparel Footwear & Accessories industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect NKE to grow earnings at a 8.25% annual rate over the next 5 years. Comparatively, COH is expected to grow at a 11.61% annual rate. All else equal, COH’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 17.54% for Coach, Inc. (COH). NKE’s ROI is 25.30% while COH has a ROI of 13.50%. The interpretation is that NKE’s business generates a higher return on investment than COH’s.

Cash Flow 




The value of a stock is simply the present value of its future free cash flows. On a percent-of-sales basis, NKE’s free cash flow was 0% while COH converted 3.04% of its revenues into cash flow. This means that, for a given level of sales, COH is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. NKE has a current ratio of 2.90 compared to 5.20 for COH. This means that COH can more easily cover its most immediate liabilities over the next twelve months. NKE’s debt-to-equity ratio is 0.31 versus a D/E of 0.53 for COH. COH is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

NKE trades at a forward P/E of 19.12, a P/B of 6.75, and a P/S of 2.42, compared to a forward P/E of 14.70, a P/B of 3.70, and a P/S of 2.49 for COH. NKE is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. NKE is currently priced at a -13.76% to its one-year price target of 58.94. Comparatively, COH is -20.35% relative to its price target of 49.49. This suggests that COH is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.30 for NKE and 2.20 for COH, which implies that analysts are more bullish on the outlook for NKE.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. NKE has a beta of 0.59 and COH’s beta is 0.47. COH’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. NKE has a short ratio of 3.24 compared to a short interest of 1.99 for COH. This implies that the market is currently less bearish on the outlook for COH.

Summary

Coach, Inc. (NYSE:COH) beats NIKE, Inc. (NYSE:NKE) on a total of 11 of the 14 factors compared between the two stocks. COH generates a higher return on investment, is more profitable, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, COH is the cheaper of the two stocks on an earnings and book value, COH is more undervalued relative to its price target. Finally, COH has better sentiment signals based on short interest.

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