Shares of mall retail giant Macy’s (NYSE:M) have plunged over the past three months, as the novel coronavirus pandemic has temporarily shuttered all of the company’s stores and killed consumer discretionary spending. Macy’s stock has dropped from $16 before Covid-19 struck, to $7 today.
But everything is starting to change for Macy’s.
That is, it appears the worst of the Covid-19 crisis is in the rear-view mirror. Over the next few months, the economy will likely re-open, consumers will start spending again, and Macy’s majorly depressed growth trends will recover.
As they do, beaten-up Macy’s stock will rebound. And not by a little. By a lot. By potentially 70%.
America Is Open Again
The coronavirus pandemic has been an awful tragedy that required all of our resources to fight. But it appears that the worst is over, and that better times are ahead.
- The science surrounding Covid-19 has gradually shifted, with the most recent data suggesting that the virus is not as deadly as initially feared, and rather only slightly more deadly that the common flu for most individuals under the age of 50.
- Given shifting science, pandemic hysteria is fading, as the number of Americans that categorized themselves as “extremely worried” about Covid-19 has dropped from 28% in late March, to 23% in late May, according to a Statista survey.
- The economy is gradually reopening, with states such as Arizona, Georgia, Florida and Texas getting back to “business as usual.”
- The economic reopening has illustrated that there is ample pent-up demand from consumers, as beaches and restaurants were very crowded this past Memorial Day weekend.
Against that backdrop, it should be no surprise that Macy’s delivered a bullish update recently: the select few stores the company has reopened, which were expected to be hit with traffic headwinds for the next several months, are already operating at approximately 50% normal traffic levels.
In other words, America is open again, and Macy’s is back in business.
Over the next few months, economic activity will continue to normalize, consumer spending trends will continue to improve, Macy’s growth trends will continue to recovery, and Macy’s stock will keep rebounding.
Zooming out, the long-term bull thesis on Macy’s stock isn’t great.
The company’s share of the U.S. retail market share has consistently eroded over the past few years amid: 1) a pivot towards e-commerce, 2) declining mall traffic and 3) a lack of initiative at Macy’s to develop omni-channel tools to fend off secular headwinds. Amid declining sales, margins have struggled, too, and profits have been decimated.
Still, Macy’s is a stalwart of mall apparel shopping. While demand for mall apparel shopping may gradually decline over the next few years, it won’t altogether to disappear. Assuming Macy’s can leverage new multichannel initiatives to win over lost sales from bankrupt peers like Sears and J.C. Penney, the company’s sales trends should be able to stabilize in the 0-1% growth range over the next few years.
Against that mild revenue growth backdrop, margins should stabilize, too, and perhaps even rise some as management closes stores and guts the expense base.
If so, then my modeling suggest that $1.75 is a doable earnings-per-share target for Macy’s by 2025. Over the past 10 years, this stock has averaged a 10-times forward earnings multiple. Based on that average multiple and a 10% annual discount rate, $1.75 in 2025 earnings per share implies a fair 2020 price target for Macy’s stock of about $12.
That’s 70% higher than where shares trade today.
Bottom Line on Macy’s Stock
Macy’s stock isn’t a long-term winner. But the stock was beaten up to unreasonably cheap levels amid the coronavirus pandemic on concerns that the world would never be normal again.
Well, the world is in the process of going back to normal now. As the world does normalize over the next few months, significantly undervalued Macy’s stock will stage a big comeback, alongside these other beaten-up stocks to buy amid this reopening rally.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.