This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, with earnings season in full swing, we’re seeing mainly analyst reactions to earnings news. Specifically, today we’ll be looking at a pair of price target hikes for coffee makers Starbucks Corporation (NASDAQ:SBUX) and Dunkin Brands Group Inc (NASDAQ:DNKN). But the news isn’t all good, so before we get to those stories, let’s find out why…
Coach is falling out of fashion
Shares of Coach, Inc. (NYSE:COH) are cratering this morning on news that the company’s fourth-quarter earnings tumbled more than 9% (to $0.78 per diluted share), despite a 6% rise in revenues. The bad news here seems to center on a 1.7% decline in comparable store sales at Coach, Inc. (NYSE:COH)’s North American unit — only the second time Coach has seen declines here in about the past four years. Worries over this drop are being compounded by the fact that, according to Coach, the market for handbags actually grew about 15% in the quarter. That means the company is losing share in a growing market.
This news led analysts at Canaccord Genuity to cut their target price on Coach, Inc. (NYSE:COH) shares to $65. However, the news isn’t all bad. For one thing, Canaccord still thinks Coach shares are a buy. For another, after today’s drop, Coach shares only cost about $53 and change, so Canaccord still sees more than 22% upside to the shares.
Are they right? Well, let’s see here. Based on the $1 billion Coach, Inc. (NYSE:COH) says it’s earned over the past year, its shares now cost about 14.5 times trailing earnings — or even a bit less, once you back out the firm’s net cash position. For a reputed 12% grower paying a better-than-2% dividend yield, this suggests the shares are fairly valued after this morning’s sell-off.
Coach, Inc. (NYSE:COH) hasn’t released cash flow information for its fourth quarter yet, but over the past four quarters for which we do have FCF data, the company appears to be holding its own — generating cash profits at or above the rate at which it records net income. This suggests that, unless things went horribly wrong in the fourth quarter, Coach, Inc. (NYSE:COH)’s quality of earnings is strong — and the stock, if not a screaming bargain, is at least unlikely to sink much further. On balance, I think Canaccord is right to recommend buying it.
Moving now to bona fide “good” news, two separate analysts have upped their price targets on two separate coffee houses, as Argus Research backs Starbucks Corporation (NASDAQ:SBUX) with a buy rating and an $84 price target, and Williams Capital ups its estimate of “outperform”-rated Dunkin’ Brands to $51.