Coach (COH)

Coach has $900 million in cash and virtually no debt, so even the toughest recession should be survivable. With an enterprise value of just under $10 billion and $679 million in free cash flow (cash from operations less capital expenditures) over the last 12 months, its free cash flow yield of 6.8% offers a 400 basis-point premium over the current 5-year Treasury. That would almost justify buying the shares even if no growth were expected.

The company has also been putting its cash flow to good use. During the second fiscal quarter, it repurchased and retired 20,480,927 shares of its common stock (more than 5% of the total shares outstanding) at an average cost of $34.51, spending a total of $707 million. At the end of the period, $661 million was available under the company’s current repurchase authorization, which was put into place in early November.

With the shares now more of a bargain than they were then, I’d expect that authorization to be used up quickly. And when I look under the covers, I come away thinking management knows what they are doing by buying back the shares now.

Focused management. Management on both the design and financial side have a solid track record and are signed on until 2010. Their combined experience should help the company continue to grow and weather any tough patches ahead.

Counter-cylical. As a well-established and stable luxury goods retailer, Coach can weather economic downturns because its customer base tends to have deeper pockets than average and the company has a practically debt-free balance sheet flush with cash.

Attentive to consumer needs. With a heavy market research-based approach, Coach will continue to anticipate the fashion and practical needs of its customers and retain its already large customer base. Yes, the recent, explosive growth may have to slow but it will not drop off.