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Coach, Inc. (COH), Fossil Inc (FOSL) & An Uncommonly Undervalued Large Cap

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It can be tough to find a truly undervalued stock in the large-cap space. With tons of analyst coverage and daily news updates, the market tends to get the pricing for these stocks right. But it’s really exciting when the market gets it wrong, such as the case with Coach, Inc. (NYSE:COH).

Coach, Inc. (NYSE:COH) tumbled nealry 10% last week as the fear that competitors in the North American market are threatening its market share. Fourth-quarter EPS came in at $0.78, below consensus of $0.89.

Coach, Inc. (NYSE:COH)The purse and accessories company had enjoyed rising profits for over three years thanks to strength in North American direct-to-consumer businesses and global expansion. But the loss of market share in its key U.S. market is leading to investor concerns.

For the full year, fiscal 2013 sales came in at slightly more than $1.2 billion versus slightly less than $1.2 billion for the same period last year. Earnings per share were up to $3.73 from $3.53 for the same period last year.

Lew Frankfort, Coach, Inc. (NYSE:COH) CEO, noted that

We generated strong international results, leveraged the men’s opportunity globally, strengthened our digital capabilities and drove excellent initial results in the re-launch of footwear. While we maintained our outstanding profitability levels, we were not satisfied with our performance in the women’s handbag and accessories category in North America.

The positives

Despite concerns of growth in North America, international is still growing nicely for Coach, Inc. (NYSE:COH). I think the balance sheet helps with downside protection, where the company has over $1 billion in cash and little-to-no debt, not to mention its 2.5% dividend yield.

The other big key for Coach, Inc. (NYSE:COH) is its opportunity in footwear and other outerwear. This market presents a vast opportunity for the company, possibly as big as the handbag market.

Bustling consumer discretionary

Let’s compare Coach, Inc. (NYSE:COH) to the other major high-end retailers, such as Fossil Inc (NASDAQ:FOSL) and Tiffany & Co. (NYSE:TIF). Fossil designs watches and other accessories. Sales are expected to be up 11.5% in fiscal 2013 for Fossil, as it continues retail expansion and new product introduction.

In recent days, the stock soared some 18% on better-than-expected earnings. The big news was that 2Q EPS was up to $1.15  compared  to $0.92 for the same period last year. Specifically, sales in Europe and Asia beat expectations.

Fossil Inc (NASDAQ:FOSL) is a watch company, with nearly 75% of revenue coming from the sale of watches. Its four key watch segments include fine $4,000-plus watches (i.e. Burberry, Fossil), premium $500-plus (Skagen, Zodiac), contemporary $60-plus (DKNY, Diesel) and mass-market $5-plus (Wal-Mart Stores, Inc. (NYSE:WMT), Target Corporation (NYSE:TGT)). I’m also encouraged by Fossil’s exposure to the fast-growing Asian market, accounting for 17% of 2012 sales.

After posting 1Q EPS of $1.21, versus $0.93 for the same period last year, Jefferies Group, Inc. (NYSE:JEF) upgraded the stock’s price target to $130. The investment firm cites solid watch sales, up 23% year-over-year in the 1Q, as a big positive. Jefferies believes that Fossil Inc (NASDAQ:FOSL) owns 10% of the watch market, with the real kicker being that the global watch business is expected to grow between 7% and 10% annually over the next few years.

Blue box

Meanwhile, Tiffany & Co. (NYSE:TIF) is the 175 year-old jewelry company famous for the little blue boxes. Jewelry accounts for over 90% of revenue. Meanwhile, the Americas account for around 50% of sales, with other major areas being Asia (20%) and Japan (17%).

Tiffany & Co. (NYSE:TIF) is looking to open over 15 new stores in fiscal 2014, with the majority in Asia. This will be one of its key markets going forward. During fiscal 1Q 2014, global same-store sales were up 8%, driven by 21% growth in Asia.

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