KORS reported earnings on Wednesday of $0.90 and the stock tumbled to close at $45.93, down from the $60 level earlier in the week. In past chart publications I have been pointing out how unrealistically expensive Michael Kors shares were when compared to the underlying revenues of the company. The multiple of revenues reached a fever pitch at 6.8X's Sales in February 2014. The reason for the change in the multiple? The rate of growth in revenue has contracted from 60% YOY into May 2014 down to 29% YOY into May 2015. Even with the reduced rate of revenue growth, we can still see that profit margins are a very healthy 20%(after-tax) and therefore justifies a PSR of at least 2.0X's sales.
I think it will be an opportunity to get long at the close on Thursday and Friday. If KORS trades lower it will be an even better valuation.
Tim 12:25AM May 28, 2015 45.93 last KORS
Comments
SPYderCrusher
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Nice Tim....
One thing I always check on any retailer is the cash flow accrual ratio -- the amount of CF from account rec. The theory being the topline item of Cash flow from operations is net income and an easy way to artificially boost net income is through aggressive accruals / revenue recognition.
for KORS it appears they have almost no accruals which frankly I find amazing is true (I did NOT check TV feed against another source)
Anyway if the data is correct it shows nearly all of net income is from cash sales which unequivocally is higher earnings quality then accrual sales.
timwest
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What I love about KORS is the zero debt, that certainly gives them plenty of flexibility to stay alive, unlike companies such as JCP and SHLD. Excellent analysis @SPYderCrusher. I'll subscribe to your posts after seeing that chart you just posted. SCMR Dynamic Levels(tm) is something I am not familiar with on your chart.
SPYderCrusher
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cool, ty. I am going to be posting more over this summer as well.
Another thing about zero debt that I like is that it gives them leeway to issue some later as well, in addition to having lower risks in the face of adverse sales or business climate.
Capital structure is interesting concept to me bc on one hand, no debt is the safest, but on the other hand, more debt = more tax shield from the corporate debt interest you can deduct which lowers tax expense. So if you look at it from purely a standpoint of how can we keep the most cash in the firm, some leverage can offset amount extra you'd have to pay in taxes wth no leverage vs. the deductibility of interest with some debt. I guess this is a classic philosophical debate over the pros and cons of one or the other. Certainly having too much debt is crippling. I remember when SHLD went thru that first major whatever it was in 2006/07 when they were trying to sell their store owned land to reduce their leverage and offset poor sales. And JCP is/was a going concern.
You're one of the few who posts / considers purely fundamental aspects of the business on TV so your perspective is always appreciated Tim
The Dynamic Levels is part of a software package I have in the TV App Store. Basically it finds the maximum imbalance over a given timeframe to identify either classic support / resistance or targets for directional trades.
timwest
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Thanks SPYderCrusher -
The philosophy of debt versus no debt is really dependent on the business (profit margins) and the competition (pricing power) and the growth opportunity (long term, or fad) at hand. If you have a massive growth opportunity, you want to leverage it as debt is the cheapest form of capital. Equity is the most expensive capital to raise since it dilutes future earnings growth. So, it would be interesting to layout the 3-dimensional plot of these variables: growth, competition, margins. I've seen many different theories through the decades, so it comes down to the CEO and the vision of the Board.
Overall, using "fundamentals" in a "trading" website is essential. I think we just need to have a few more ways to share ideas so that fundamental charts are in a different area than technical charts. With fundamentals, you want to buy great companies when they look terrible on the charts and peel some off when they look great. With technicals only, you typically want to buy along with others who are buying, hoping to front run a much larger fundamental buyer who has new information and is stepping up their purchases. In reality, the waves in the markets are mostly from PM's jockeying to move into and out of positions, with traders getting caught in between trying to make a market and to position themselves. Speculators just help to drive the price up enough until the buyers step away, and help to figure out what their "top" price is for the stock. It's all a great game.
Looking forward to more of your comments SPYderCrusher. Glad to make a connection with you.
Cheers,
Tim
SPYderCrusher
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Hey Tim some how I did not catch this reply at the time but thank you for it, great stuff. Totally concur with your take on marrying fundamentals with TA. Its a somewhat crude analogy but if you liken a company to a person, a person who is homeless and finds a sack with $500 -- that money is huge in terms of what it means for the quality of life (can shower, rent a motel, get food etc) so the stock goes up sharply. But....it may, big picture, not change some of the overarching themes that led to the homelessness in the first place. So in this sense you have a picture where if you only looked at TA youd say huge momentum move up, but if you had a better knowledge of the fundamentals you could surmise the big picture fundamentals are still relatively unchanged and bearish so the move would be sold. Anyway, bit of a stretch on the analogy there but its indicative of why understanding the story is as important as the price behavior too.
timwest
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I banked some profits here this afternoon after 3PM. Nice move with no heat. Nice analysis @SPYderCrusher
SPYderCrusher
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awesome job, sweet trade, and thank you :D
timwest
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Note the sell signals ....
timwest
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Oh well - I had highlighted the two sell signals I had put on the stock.
QuantitativeExhaustion
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Another option play.... How about this CONN play coming up? Earnings are pre-market June 2nd. Lot of option activity and a recent downgrade from a junior analyst (suspicious) few days before earnings.
One thing I always check on any retailer is the cash flow accrual ratio -- the amount of CF from account rec. The theory being the topline item of Cash flow from operations is net income and an easy way to artificially boost net income is through aggressive accruals / revenue recognition.
for KORS it appears they have almost no accruals which frankly I find amazing is true (I did NOT check TV feed against another source)
Anyway if the data is correct it shows nearly all of net income is from cash sales which unequivocally is higher earnings quality then accrual sales.