Macy's: A Compelling Value

06/06/2017 2:54 am EST

Focus: CONSUMER

Ben Reynolds

Editor, Sure Dividends

Macy's (M) stock price suggests the company is fighting for its life, as it has declined by ~20% over the past year, notes Ben Reynolds, dividend expert and editor of Sure Retirement.

The company recently reported its quarterly results, and the market was not impressed. Adjusted earnings-per-share fell significantly, but guidance for the year is for adjusted earnings-per-share to be down just ~3% versus fiscal 2016 - not a significant decline.

The real value of Macy's lies in its low price and strong cash flow generating business. The company's operations still generate significant cash flows, which  management uses to buy back stock and pay dividends.

And, Macy's is significantly undervalued. The company is trading at a discount to the value of its real estate. This means you basically get the cash flow cow operating business at Macy's for 'free' when you invest in the company.

The company was founded in 1858 and has since grown to be one of the nation’s largest retailers with fiscal
2016 sales of $26 billion; it operates more than 700 stores under the Macy’s and Bloomingdale’s brands, as well as some 125 specialty stores.

Macy’s competitive advantage comes from its profitability in the highly competitive retail space. While many of its competitors are bleeding cash, Macy’s generated $1.2 billion of free cash flow in 2016 with a return on invested capital of 18.5%.

Quantitatively, Macy’s is currently trading at a remarkably low valuation (9.7x 2017’s expected earnings) based on fears that its business model will be permanently disrupted. A more reasonable price-to-earnings ratio of 13 (in-line with historical averages) results in a fair value estimate of $39.

Macy’s value proposition extends beyond earnings - activist investment firm Starboard Value believes Macy’s real estate alone is worth $21 billion (more than twice its current market value and significantly higher than its enterprise value of ~$14 billion).

Macy’s is leveraging this real estate to optimize its cash flow by closing less productive stores and selling the underlying real estate ($673 million of sales in 2016). Proceeds are used to repurchase stock and improve Macy’s best-performing locations.

Macy’s presents a compelling value opportunity right now -– based on either earnings or assets, the company is trading well below its intrinsic value.

Further, Macy’s is generating substantial current income for its shareholders. Investors who rely on Macy’s for income need not worry about the safety of its dividend, as the current payout is just 49% of 2016’s adjusted earnings-per-share.

The company recently reported its quarterly results, and the market was not impressed. Adjusted earnings-per-share fell significantly, but guidance for the year is for adjusted earnings-per-share to be down just ~3% versus fiscal 2016 - not a significant decline.

The real value of Macy's lies in its low price and strong cash flow generating business. The company's operations still generate significant cash flows, which  management uses to buy back stock and pay dividends.

And, Macy's is significantly undervalued. The company is trading at a discount to the value of its real estate.  This means you basically get the cash flow cow operating business at Macy's for 'free' when you invest in the company.

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