Coach Vs. Tiffany

Cramer put the same test and 10-point rating system he used to compare McDonald’s and Burger King to work in a head-to-head match-up between Tiffany & Co. and Coach.

(You can read more about how Cramer – and Wall Street’s big money mangers – values stocks in that McDonald’s Vs. Burger King post.)

As we said, sector matters the most. Money managers look for sectors that will outperform the S&P 500, a widely recognized measure of the market average. And sectors are important because they account for 50% of a stock’s performance. So when you’re considering retail names like Tiffany and Coach , you have to think about that sector’s potential in this environment.

Inflation no longer seems a concern to the Federal Reserve and that frees up the central bank to cut interest rates if need be. So at first glance, there’s reason to think the big money will look at retail as a recovery play. But both the American and Japanese – the second biggest market for Tiffany and Coach – economies aren’t standing on solid ground just yet, so this sector’s a mixed bag. Since stock get five points in Cramer’s rating system for sector alone, he’s giving both companies 2.5 points.

When it comes to growth, there’s no question Coach, with a 16% long-term growth rate to Tiffany’s 13%, is the better performer. Give 2.5 points to Coach and one to Tiffany. Score: 5-3.5 Coach.

Coach wins in the consistency category as well. The company’s brought in new designers more recently and Cramer’s a fan of CEO Lew Frankfort. So Coach gets half a point here to Tiffany’s none. Score: 5.5-3.5, Coach.

Tiffany gets a half point for actually having a dividend, one worth 1.6%. Coach gets none for having non. Score: 5.5-4, Coach.

Raw costs and how companies handle them – especially in this environment – should always get a good look, too. For the fiscal year ending July 29, Coach’s operating margins were 37% versus 19% for Tiffany. No real contest there – Coach controls its costs better. Score: 6.5-4, Coach.

So Coach is clearly the winner here. But how is Wall Street valuing these stocks? Tiffany trades at 12.7 times forward earnings compared to Coach’s 11.7. So the Tiffany actually has a higher multiple despite Coach’s outperformance. According to our calculations, something’s wrong here.

Still, retail is still an iffy proposition right now, so proceed with caution if you’re considering buying Coach. But ultimately, at least according to this rating system, and it’s one that the big money guys use, Coach is a better stock than Tiffany right now.

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