Undervalued Michael Kors, FCF/EV Yield 16%, Shareholder Yield 19% – Large Cap 1000 Stock Screener

Michael Kors

One of the cheapest stocks in our Large Cap 1000 Stock Screener is Michael Kors Holdings Ltd (NYSE:KORS).

 

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Michael Kors Holdings Limited (Kors) is a designer, marketer, distributor and retailer of branded women’s apparel and accessories and men’s apparel bearing the Michael Kors tradename and related trademarks MICHAEL KORS, MICHAEL MICHAEL KORS, and various other related trademarks and logos. The company operates through three segments: retail, wholesale and licensing. The retail operations consist of collection stores and lifestyle stores, including concessions and outlet stores, located primarily in the Americas (the United States, Canada and Latin America), Europe and Asia, as well as e-commerce. Wholesale revenues are principally derived from major department and specialty stores located throughout the Americas, Europe and Asia. The company licenses its trademarks on products, such as fragrances, beauty, eyewear, leather goods, jewelry, watches, coats, men’s suits, swimwear, furs and ties, as well as through geographic licenses.

A quick look at Kors share price history over the past twelve months shows that the price is down 33%, but here’s why the company is undervalued.

The following data is from the company’s latest financial statements, dated March 2017.

The company’s latest balance sheet shows that Kors has $228 Million in total cash and cash equivalents. Further down the balance sheet we can see that the company has short-term debt of $133 Million and $0 Million in long-term debt. Therefore, Kors has a net cash position of $95 Million (cash minus debt).

In addition to the company’s strong balance sheet, all financial strength indicators show that Kors remains financially sound with a Piotroski F-Score of 5, an Altman Z-Score of 9.10, and a Beneish M-Score of -2.10.

If we consider that the company currently has a market cap of $5.329 Billion, when we subtract the cash totaling $95 Million that equates to an Enterprise Value of $5.234 Billion.

If we move over to the company’s latest income statements we can see that Kors had $690 Million in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 7.58, or 7.58 times operating earnings. That places Kors squarely in undervalued territory.

The Acquirer’s Multiple is defined as:

Enterprise Value/Operating Earnings*

*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that Kors generated trailing twelve month operating cash flow of $1.028 Billion and had $170 Million in Capex. That equates to $858 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 16%.

So while the company has a very strong balance sheet and ability to generate strong free cash flow the company’s share price is still down 33% in the past twelve months. With this in mind let’s take a look at the company’s current financial position.

Kors has historically high revenues of $4.493 Billion (ttm) but the company’s net profits of $553 Million (ttm) are well off the historical highs of $881 Million in 2015. Something which seems to be overlooked however is that Kors current free cash flow of $858 Million (ttm) is an historical high compared to just $472 Million in 2015. That’s an increase of 45%. The reason is that the company has significantly reduced its capex from $385 Million in 2015 to just $170 Million (ttm). In fact you would have to go back to 2013 to find lower capex of $130 Million, when the company had more that 50% less revenue.

In terms of Kors present valuation. The company currently has historically high revenues and free cash flow yet its currently trading on a Price/Earnings of 10.5 compared to its 5Y Average of 29.5*, a Price/Cash of 5.6 compared to its 3Y Average of 16.6*, a P/S of 1.3 compared to its 5Y average of 4.4*, and a P/B of 3.4 compared to its 5Y average of 9.9*. In addition Kors is trading on a FCF/EV Yield of 16% (ttm) and an Acquirer’s Multiple of 7.58, or 7.58 times operating earnings, plus the company provides a shareholder yield of 19% due to its $1.005 Billion (ttm) share buybacks. All of which indicate that the company remains squarely in undervalued territory.

Source: Morningstar

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Article by Johnny Hopkins, The Acquirer's Multiple



About the Author

The Acquirer's Multiple
The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com. The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”