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Don’t Expect Much of a Rally From Nordstrom, Inc.

Nordstrom stock might fetch a $55 offer, but anything above that seems unlikely

By Luke Lango, InvestorPlace Contributor

Here's How Nordstrom Stock Can Rally Back Towards $60 In This Year

Source: Phillip Pessar via Flickr (Modified)

Nordstrom, Inc. (NYSE:JWN) made stock market headlines recently after the company’s board of directors rejected a $50-per-share go-private offer from the Nordstrom family.

The Nordstom family, which collectively owns 31% of JWN stock, has been trying to take Nordstrom private for the better part of the past year. The family feels that the only way for Nordstrom to succeed in the long-term is for the company to majorly overhaul itself and make huge investments in its stores and e-commerce. Such huge investments are often hard to make under the public spotlight. Going private, thus, seemed like a sensible way for JWN to reinvent itself with mitigated backlash.

But taking a debt-loaded, $8.5 billion national retailer private is about as hard as it sounds. The Nordstrom family was forced to put its go-private plans on hold during the holidays upon discovering that financing for a $10 billion-plus buyout (including debt) would be hard to find.

JWN has since reported much better-than-expected holiday numbers. As it turns out, that was the exact punch in the arm financiers needed to help the Nordstrom family get a deal done.

The family proceeded to offer $50 per share to take the whole company private. But the board didn’t like the deal. It was rejected.

And now, JWN stock seems to be stuck in neutral.

What’s next?

It’s hard to imagine JWN stock getting taken out at a big premium to its current $52 price tag. Consequently, I don’t think JWN stock is worth much of your time at current levels. It will likely be taken private, but the upside potential for shareholders is limited.

Nordstrom Stock Doesn’t Have Much Upside Left

For the better part of the past year, JWN stock has traded alongside these go-private rumors. As the rumors heat up and it looks like a deal is going to pass, JWN stock rallies. When the rumors cool off, JWN stock drops.

Right now, on the heels of strong holiday numbers and with renewed go-private interest on the table, JWN stock has rallied to 52-week highs. Investors are clearly as optimistic as ever about the prospects of the Nordstrom family taking the company private.

There is good reason for that. JWN did just report really strong holiday numbers that paved the path for positive sales growth and margin improvements over the next five years. The retailer does seem to be turning a corner in terms of profitability. That gets investors and financiers excited.

But not that excited.

At $52, JWN stock is trading at 15.2-times forward earnings estimates of $3.40 per share. That is a pretty big multiple. Especially considering revenue growth over the next several years is pegged at just 1-3% and earnings growth over the next five years is expected to be right around 5-6%.

That means JWN stock’s forward multiple is roughly triple its five-year forward earnings growth prospects.

That is pretty absurd. According to YChartsKohl’s Corporation (NYSE:KSS) is trading at a much lower multiple (12.5-times forward earnings) for much bigger growth prospects (about 8.5%). It’s the same with Macy’s Inc (NYSE:M), which is at 8.6-times forward earnings for  about 7.5% long-term earnings growth.

Clearly, JWN stock is buoyed right now by sky-high optimism regarding a go-private offer. Otherwise, the current valuation doesn’t add up. Buyers here, then, are banking on a big go-private premium. But it looks like that is already priced in, so upside in every scenario looks limited from these levels.

Bottom Line on Nordstrom Stock

Maybe Nordstrom will get taken private at $55 per share. If so, then buyers here are looking at 5-6% upside.

That is good, but not great, considering the downside risk looks immense given the currently bumped-up valuation. Overall, I don’t think investors should expect anything big from Nordstorm stock in the foreseeable future. Upside, even from a go-private offer, looks limited at these elevated levels.

As of this writing, Luke Lango was long KSS and M. 

Article printed from InvestorPlace Media, https://investorplace.com/2018/03/dont-expect-rally-nordstrom-inc-jwn-stock/.

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