Inside Wall Street: A Revived Macy's Is Priced Right

The three-day Presidents' Day holiday is the one of the first long weekends after the year-end holiday festivities that shoppers look forward to for some serious bargain-hunting. The nation's retailers, still reeling from the recession's crushing impact, are equally excited over the prospects of attracting more of those elusive consumer dollars.One giant retailer that's likely to attract a lot of the crowd is Macy's (M), which has vastly improved the quality of many of its products and stores, and the efficiency of its services over the past couple of years. Management has been focusing not only on slashing costs but on streamlining Macy's huge operations. The company owns and operates more than 850 department stores under the names Macy's and Bloomingdale's in 45 states, plus the District of Columbia, Puerto Rico and Guam.

Beyond striving to offer shoppers great buys, Macy's is also a stock for investors scouting for value in the beleaguered retailing industry. Currently trading around $17 a share, the stock has yet to fully participate in any of the past market rallies that had been sparked by signs of an economic recovery. And now that the market has again come under pressure, Macy's shares are showing unexpected resiliency, to the surprise of many analysts.

Heading for a "Growth Trajectory"

The stock, which hit a 52-week high of $20.84 a share on Oct. 14, 2009, is trading at a discount to its peers based on earnings projections for the next 12 months. Over the past five years, Macy's stock has traded in a wide range, from 3.9 times to 21 times its trailing 12-month earnings. At the close on Friday, Feb. 12, Macy's traded at $17.32 a share, a price-earnings ratio of 16, vs. the industry's 17. At its peak in 2007, Macy's traded as high as $46 a share.

Analyst Liz Dunne of investment firm Thomas Weisel Partners, who rates Macy's overweight, figures the stock is worth $25 a share, based on 14 times her recently increased 2010 earnings estimate of $1.77 a share. She raised her estimate from an earlier $1.57 per share after Macy's boosted its own earnings projections for the fourth quarter ending Jan. 31, prompted by the more-than-expected 3.4% increase in its January same-store sales.

"Macy's is taking steps to increase sales, profitability and cash flow, which will put it on the growth trajectory once the economy rebounds," says Zacks Investment Research, which upgraded the stock to outperform on Feb. 10, from neutral. Some of the measures Macy's took include integration of what were complex operations after several big acquisitions, consolidation of divisions and customer-centric initiatives. Zacks estimates that first two moves alone will result in an annual savings of $400 million, starting in 2010.

By improving the in-store shopping experience, making sure that its merchandise is priced fairly without indulging in give-aways and taking efforts to meet its customers' needs, Macy's has been able to get more customers into its stores, notes Zacks in a report.

Wall Street Isn't Impressed

Indeed, Macy's had to take some bitter medicine to combat the economic downturn and push itself back toward growth. That included strict inventory controls, slashing payroll and headcount and cutting its quarterly dividend by 62%. The company also reduced its capital budget in 2009 to $450 million from $897 million in 2008 and $1.1 billion in 2007. And it used some of its assets and cash flow to raise $925 million to pay off debt of about $1 billion that matured in 2009.

So far, Wall Street isn't so hot on retailers due to the specter of massive unemployment, tepid bank lending and restrained consumer spending. Only seven of the 20 analysts that cover Macy's have a buy recommendation. However, none rate the stock a sell. The rest are neutral, obviously waiting for stronger signals that spending will resume and the recovery is well in sight.

So it isn't surprising that some big institutional investors have unloaded shares, including AXA (AXA), which sold 4.5 million shares as of Sept. 30, 2009, and holds a stake of 8%. Waddell & Reed Financial shed 2.2 million shares as of Dec. 31, 2009, and is left with a 1.8% interest.

But going against the tide is behemoth Fidelity Management, which purchased 6.2 million shares and increased its stake to 5.2%.

So, for investors who like to seize good-value opportunities by swimming against the mainstream, Macy's is a rightly priced prize.
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