Coach Inc. (COH) offers an interesting fundamental proposition. While consumers may be curtailing spending as they try to rebuild their savings, Coach is well positioned to take advantage of the upper middle class women who value owning Coach products.

The company has weathered the recession well and is positioned to benefit from the economic recovery in the U.S., Europe, Asia and the Middle East.

The review below presents the fundamental case for Coach. The chart shows the potential to buy shares on a reasonable pull to a support level.

92%

The return on capital employed and earnings yield are based on Joel Greenblatt's "Magic Formula".

Value

Coach posses an excellent Return on Capital in excess of 100%, my ideal target. In addition, the company generates a 10% earnings yield also my ideal target. This is an excellent result for a company that is in the retail sector. Though it is in the higher end and has a very strong following with high loyalty among its customers.

Their free cash flow margin of 23% indicates they are able to run their business very well and manage their use of cash very carefully. This is a strength for the company as the economy recovers.

Growth

Presently, the recession is limiting coach's revenue growth. It is impressive that their revenue is just flat in the face of the contraction in consumer spending. As the economy turns around, Coach should benefit from new growth in revenues.

Reflecting the growth potential is the enterprise value vs. free cash flow ratio which reflects the company's ability to grow its free cash flow. The company has been able to cut expenses to match the drop in revenues. This bodes well for margins to expand when revenues turn back up, as they should grow faster than expenses.

In addition, Coach has only $25 million in debt giving the company additional financial flexibility.

Conclusion

Coach is well positioned to be a value and growth company that will benefit from a recovery in the economy. In addition, Coach's target customer base is less affected by the recession as they serve the higher end retail segment.

Look to buy on dips in the price of the shares to support levels. Use covered calls to enhance your return and lower the breakeven price. Consider using protective puts to lower down side risk when the price hits interim highs or before earnings announcements.

Key Drivers and Barriers

Drivers (outside forces)

The key drivers for Coach are:

1.      The demand from women to be seen with the right products, especially hand bags.

2.      The growing upper middle class in China, Brazil, and other emerging economies.

3.      The economic cycle that should have a positive affect on the consumer as the world's economies recover.

Barriers (sustainable advantages)

The barriers Coach has in place to help it sustain its leadership position are:

1.      Their brand image and the loyalty of their customer base.

2.      Strong balance sheet with growing cash, gives them staying power in weak economic situations.

3.      Their consistent ability to design products that their customers want.

Risks

The key risks Coach faces include:

1.      Risk the global economy will not recover as rapidly as some expect.

2.      Their products might lose their appeal causing customers to seek alternative products.

Guidance

The company does not offer guidance at this time.

Other Considerations

none

The Bottom Line

Buy on dips in the price. Look to protect your position with covered calls and protective puts. Be ready to sell if the investing theme does not work as expected.

Disclosure: As of this writing, I do not have a position in Coach, though I will be looking to acquire shares on a reasonable pull back in the price.