Investing: Upscale, downscale
BY KATHY KRISTOF Kiplinger News Service
Monday, July 09, 2012
Insider overview: Chesapeake Energy Corp.
Here’s a head-scratcher: Coach, the purveyor of pricey purses, keeps banging out record profits at the same time that Dollar General, which appeals to price-conscious shoppers, rakes in cash hand over fist.
But maybe the dynamic isn’t as contradictory as it seems. In tough times, middle-income consumers flock to discount chains. Those discounters that offer quality and good prices have seized the moment to convert normally higher-end shoppers into loyal customers. The rich, however, continue to frequent their favorite stores through upturns and downturns alike.
With the economy once again looking tenuous, the resilience of retailers that cater to the outer edges of wealth has not been lost on Wall Street.
Shares of Coach (symbol COH) are usually almost as pricey as the firm’s handbags. But the market’s spring plunge, triggered by concerns about economic weakness in Europe (where Coach has only a modest presence) brought the shares into reasonably priced territory. Down $20 from its late-March high, Coach, at $58, sells for 14 times estimated year-ahead earnings.
Widely admired for selling stylish, well-made goods, Coach profit margins are the envy of the industry. The company reported that earnings for the quarter that ended March 31 were up 24 percent. Coach also hiked its dividend by 33 percent in April, and its stock yields 2.0 percent. Analysts expect Coach to deliver blistering annual earnings growth of 16 percent over the next three to five years. Jason Asaeda, an analyst with S&P Capital IQ, expects the stock to hit $85 within the next year.
Dollar General (DG), based in Goodlettsville, Tenn., operates 10,052 outlets in 40 states. The stores are usually 7,000 to 12,000 square feet -- a fraction of the size of a Wal-Mart superstore. The smaller size allows the chain to set up shop in conveniently located suburban malls. Its stores specialize in food and housewares -- particularly paper and cleaning products, which customers frequently replace.
The company’s stock is not as cheap as the stuff on its shelves, however. At a recent $54, Dollar General sells for 19 times current-year estimated earnings. But there are plenty of suburban communities yet to be penetrated, and Joan Storms, of Wedbush Securities in Los Angeles, thinks the company’s superior growth prospects justify its above-average price-earnings ratio. Her one-year price target is close to the current share price, but with analysts projecting three- to five-year earnings growth of 18 percent a year, the stock could deliver a pleasant surprise.
Kathy Kristof is a contributing editor to Kiplinger’s Personal Finance magazine. To send her a question or comment, go to tulsaworld.com/kiplingerfeedback.