Macy's Big Beat

| About: Macy's Inc. (M)

Macy's (NYSE:M) posted very solid results across the board when it reported results earlier this morning. Regular readers of my columns in Seeking Alpha & TheStreet.com know that I have been significantly underweight the Consumer Discretionary sector for some time. This is mainly due to valuations, a huge run up in the sector over the past few years and tepid economic & jobs growth domestically. Macy's however proves once again why it is one of the few consumer discretionary stocks I continue to hold in my core portfolio.

Positives from Earnings Report:

  • The company posted EPS of 47 cents for the quarter; a big beat over the 39 cents a share consensus.
  • Revenues came in at $6.27B, almost $90mm above estimates.
  • Same-store sales rose 3.5% Y/Y.
  • Management also stated October provided a strong start to the fourth quarter.

5 additional reasons Macy's is still a "Buy" at ~$48 a share:

  1. Earnings should post a ~10% increase Y/Y this fiscal year and analysts foresee another 10% to 15% gain in FY2014.
  2. The company has now beat earnings estimates on the bottom line for 12 of the last 13 quarters. This stellar quarter and management's positive forward comments should also boost earnings estimates for FY2014 over the next few weeks.
  3. The stock goes for under 11x forward earnings, a slight discount to its five-year average valuation (11.9) and also has a five-year projected PEG of 1.
  4. Macy's has a solid balance sheet and also pays a dividend yield of over 2%. The company has quintupled dividend payouts since emerging from the financial crisis. I would look for dividend growth to be inline with earnings growth over the next few years.
  5. Gas prices have dropped significantly over the past few months. This should help all retailers, especially apparel, including Macy's. One of the core reasons I am slowly becoming more positive on the sector as well.

Disclosure: I am long M. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.