Macy’s Stock Looks Like a Steal Even After a 700% Rally

by Dan Burrows | February 25, 2014 2:30 pm

Macy’s (M[1]) clobbered Wall Street’s fourth-quarter profit expectations even as sales came up short, suggesting Macy’s stock has even more room to run despite a long period of extreme outperformance.

macy's-stock-m-stockMacy’s, which operates Macy’s and Bloomingdale’s department stores, has been a standout in the troubled retail sector throughout its recovery. While storied names like JCPenney (JCP[2]) and Sears Holding (SHLD[3]) are struggling simply to survive, Macy’s has been on tear — and that has been great for anyone holding Macy’s stock.

Since the bear-market bottom of March 2009, M stock is up a whopping 700% as of Feb. 24. Just how good is that? This boring old bricks-and-mortar retailer is even beating Apple (AAPL[4]) and Amazon (AMZN[5]), which have gained 532% and 492%, respectively, over the same period. (The S&P 500 is up 173% over the span.)

Macy’s stock has been a big winner more recently too. Over the last 52 weeks, M stock has gained 45%. The S&P 500 is up 24% over the last year, while competitors like Dillard’s (DDS[6]), Nordstrom (JWN[7]) and Kohl’s (KSS[8]) have gained between 8% and 14%.

Indeed, Macy’s stock has been a leader in two of the most popular retail exchange-traded funds, helping the Retail SPDR (XRT[9]) gain 27% and the Consumer Discretionary Select SPDR (XLY[10]) rise 33% in the past year.

Macy’s stock is benefitting from reliable earnings growth even as the broader retail industry struggles with the recession hangovers of high unemployment, stagnant wages and tighter credit conditions. Including the most recent results, Macy’s has exceeded analysts’ average estimate in seven of the last eight quarters.

For the fourth quarter, Macy’s reported earnings of $811 million, or $2.16 per share — up from $730 million, or $1.83 per share, a year earlier. After stripping out restructuring costs (as analysts usually do), Macy’s earnings came to $2.31 share, well ahead of analysts’ estimate for $2.17, according to a survey by Thomson Reuters.

Revenue, however, did come up short, declining 1.6% to $9.2 billion, whereas analysts were projecting revenue to hit $9.27 billion. Macy’s said frigid winter weather and an additional week of selling in last year’s quarter were responsible for the disappointing top-line results.

The market looked past the revenue miss to send Macy’s stock up sharply Tuesday morning. But despite this latest pop — and years of crazy outperformance — M stock still looks attractive on a relative valuation basis.

The forward price-to-earnings multiple (P/E) on Macy’s stock is in line with it’s own five-year average. No, that doesn’t make M stock cheap, but that means it’s not overpriced, especially at a time when so much broader market upside has been driven by multiple expansion.

Macy’s stock does, however, look like a bargain considering its price-earnings-to-growth ratio (PEG). PEG measures how fast a stock is rising relative to its growth prospects. In the case of Macy’s stock, the PEG looks compelling. Macy’s has a long-term growth rate of 11.83%. That makes the PEG 1.3. In other words, Macy’s stock is not only 18% cheaper than its own five-year average, it’s 42% cheaper than the S&P 500.

M stock also trades a discount to its peers on a forward earnings basis, although that’s partly because some big competitors don’t have earnings (cough, JCPenney and Sears).

At any rate, those valuation figures make the case for Macy’s stock being on sale. With the market hitting all-time highs, bargain stocks are getting harder to find. Macy’s stock, despite the 700% run over the last five years, look like steal under those conditions.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

  1. M:
  2. JCP:
  3. SHLD:
  4. AAPL:
  5. AMZN:
  6. DDS:
  7. JWN:
  8. KSS:
  9. XRT:
  10. XLY:

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