Much like Broadcom Ltd (NASDAQ:AVGO) and Qualcomm, Inc. (NASDAQ:QCOM), there’s drama developing between Nordstrom, Inc. (NYSE:JWN) and the Nordstrom family. Last week, Nordstrom stock fell after the board rejected the family’s takeover offer of $50 per share. It’s making investors wonder if they should buy JWN stock — currently just under $50 per share — or if there’s any value left.
Nordstrom currently has a market cap of roughly $8.4 billion. Is it worth that much? Given its current valuation and the fact that many regard Nordstrom as a well-run retailer, one could argue it deserves that number. Still, how much more can shareholders reasonably expect to receive in a deal?
The $50 a share offer values the retailer at 6.2 times EV/EBITDA. Over the last five years though, JWN stock has typically traded at about 6.6 times EV/EBITDA.
One could argue that the five-year valuation shouldn’t matter. Five years ago the retail environment was more promising for companies like Macy’s Inc (NYSE:M), Kohl’s Corporation (NYSE:KSS) and J.C. Penney Company Inc (NYSE:JCP). Amazon and e-commerce didn’t have as much of a grip on the industry and while physical retail locations were under pressure, it wasn’t as intense as it is now.
With the Nordstrom family clearly wanting to take the business private, though, I think investors easily have a right to ask for an in-line valuation, if not a premium to the five-year historical valuation. That would give Nordstrom stock an enterprise value of about $10.5 billion, roughly 6.5% above its current $9.9 billion. Factoring that into the share price puts JWN stock between $54 and $55.
JWN Valuation May Not Be Enough
Based on many investors’ assumptions, though, an in-line valuation will not be enough. Especially after its acquisitions of retail technology companies BevyUp and MessageYes. Nordstrom is looking for ways to incorporate machine learning and customer data to improve the shopping experience. While these efforts could prove futile, they could also boost the company’s omni-channel operations and keep Nordstrom relevant for years to come.
At least in investors’ minds, they will likely believe these assets translate to a premium rather than a discount in the share price. Many have been arguing for $60 or more in a takeout, or a whopping 20% above current levels. Would it be enough to convince shareholders and even so, would the family pony up to pay that much?
I don’t know that they will. The board declined an offer for $50 per share, but didn’t give many clues as to what it would take to get a deal done. Shares are up 31% from $38 in November and the family’s interest in taking Nordstrom stock private hasn’t exactly been a secret. So it’s possible that there’s been some takeover premium already priced into the stock.
If I’m looking to buy JWN stock, it has to be based on fundamentals. The M&A aspect can be treated as an added kicker, but I would not buy for that reason alone.
Trading JWN Stock
As retailers go these days, Nordstrom stock isn’t the cheapest in the bunch. Trading at 14 times forward earnings, JWN is more expensive than both Macy’s and Kohl’s, which trade at 8.9 and 11.4 times, respectively. JWN is also more expensive on an EV/EBITDA basis.
However, Macy’s has negative earnings and sales growth forecasts for both this year and next. Not exactly a ringing endorsement in this type of shopping climate. Kohl’s however is forecast to grow earnings 26% this year and another 4.6% in 2019. Analysts expect sales during this period is to grow 0.4% and 1.1%, respectively. It also pays a 3.9% dividend yield.
For Nordstrom, analysts estimate 18.6% earnings growth in 2018 and 3.5% in 2019. For sales, they expect 1.5% and 2.7% growth, respectively. JWN stock yields 2.9%. By these metrics, KSS stock is cheaper, has better earnings growth for the next two years and pays a higher dividend.
Investors can also consider a stock like Home Depot Inc (NYSE:HD). The company is forecast to grow earnings 26% this year and boost revenue 6.9%. The company just reported 7.5% comparable-store sales — wow! — and is one of the industry’s best-performing stocks.
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For those sticking with Nordstrom stock, keep it simple. Look for $46 to $48 to act as support (black line) and resistance to come in between $54 and $58 (blue lines). It also wouldn’t be surprising to see a buyout offer within this $4 range. Not because of the technicals, but because of the valuation JWN stock would have.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell had a long position in HD.
