Macy’s Inc (NYSE:M) stock holders can’t figure out whether to buy or take profits after Citigroup contended that M stock could gain as much as 27%.
Macy’s shares initially moved up on the news before nearly erasing their gains and is now back up nearly 3%.
Citi upgraded M stock from a “hold” to “buy” Wednesday, pointing out Macy’s valuation, cash flows and dividend as reasons for the upgrade.
From Paul Lejuez, an equity analyst with Citi:
“Although we do not believe the long-term structural challenges to department stores are likely to go away, M ‘gets it’, and is doing the right things for the business, which should help alleviate pressures in the medium term.”
The upgrade comes on the heels of Macy’s deal with Apple Inc. (NASDAQ:AAPL) to sell Apple Watches and iPhones in its stores, as well as open an Apple Store in Manhattan.
Citi was also impressed with Macy’s decision to shutter 100 stores, as it allows the fashion retailer to “[rationalize] its store fleet.”
“The move also shows management is thinking the right way strategically about how to enhance shareholder value longer term,” according to Citigroup. “As many stores to close are not earning an adequate return on invested capital.”
With a 4.25% yield, M stock is a rather cozy place for income investors. And because Macy’s is a cyclical consumer goods stock, it records the biggest addition to free cash flow during the holiday shopping season. Considering it already has $1.1 billion in FCF right now, it’s likely to see a boost large enough to put it on par, or higher, with the $1.68 billion in FCF it posted in 2014.
And Citi expects Macy’s to be “one of the stronger horses in the race” this holiday season, with seasonal weather helping M stock manage stronger year-over-year comps.
If you’re considering buying right here because of its price-earnings ratio of 14, just know that it’s pretty standard for the industry. But you could do a lot worse.
As of this writing, John Kilhefner did not hold a position in any of the aforementioned securities.
