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Is Michael Kors a Great Stock for Value Investors?

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Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Michael Kors Holdings Limited (KORS - Free Report) stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, Michael Kors has a trailing twelve months PE ratio of 10.27, as you can see in the chart below:

This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 compares in at about 19.87. If we focus on the stock’s long-term PE trend, the current level puts Michael Kors’ current PE ratio below its midpoint over the past five years, with the number having risen rapidly over the past few months.

Further, the stock’s PE also compares favorably with the broader industry’s trailing twelve months PE ratio, which stands at 19.31. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.

We should also point out that Michael Kors has a forward PE ratio (price relative to this year’s earnings) of 11.46, which is tad higher than the current level. So it is fair to expect an increase in the company’s share price in the near term.

P/CF Ratio

An often overlooked ratio that can still be a great indicator of value is the price/cash flow metric. This ratio doesn’t take amortization and depreciation into account, so can give a more accurate picture of the financial health in a business. This is a preferred metric to some valuation investors because cash flows are (a) generally less prone to manipulation by the company’s management and (b) are less affected by variation in accounting policies between different companies.

The ratio is generally applied to find out whether a company’s stock is overpriced or underpriced with reference to its cash flows generation potential compared with its competitors. However, it is not commonly used for cross-industry comparison, as the average price to cash flow ratio varies from industry to industry.

In this case, Michael Kors’ P/CF ratio of 8.77 is lower than the industry average of 17.47, which indicates that the stock is significantly undervalued in this respect.

Broad Value Outlook

In aggregate, Michael Kors currently has a Value Style Score of ‘A’, putting it into the top 20% of all stocks we cover from this look. This makes Michael Kors a solid choice for value investors.

What About the Stock Overall?

Though Michael Kors might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘A’ and a Momentum score of ‘A’. This gives KORS a VGM score—or its overarching fundamental grade—of ‘A’. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been favorable. The current quarter has seen six estimates go higher in the past sixty days compared to one lower, while the full year estimate has seen seven up and in the same time period.

This has had a significant impact on the consensus estimate as the current quarter consensus estimate has increased by 6.4% in the past two months, while the full year estimate has soared 3.9%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

 

Despite the bearish bullish sentiments, the stock holds a Zacks Rank #3 (Hold). Thus, we are looking for in-line performance from the company in the near term.

Bottom Line

Michael Kors is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Furthermore, a strong industry rank (among Top 20% of more than 250 industries) instills investor confidence.

However, over the past two years, the broader industry has clearly underperformed the broader market, as you can see below:

So, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.

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