Macy's, Inc. owns some great department stores, but how does the company itself look when compared on a fundamental analysis to other companies? Intelligent Investors must take the time to do fundamental analysis in order to calculate an intrinsic value of a company. Only through comparing the company's intrinsic value to the market place can an investor truly get a sense of whether the company is a good investment. In addition, a company must have strong financial statements and prove that it is stable enough for Intelligent Investors. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Macy's, Inc. fares in the ModernGraham valuation model.
M data by YCharts
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
- Earnings Stability - positive earnings per share for at least 10 straight years - FAIL
- Dividend Record - has paid a dividend for at least 10 straight years - PASS
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
- Moderate PEmg ratio - PEmg is less than 20 - PASS
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
- Earnings Stability - positive earnings per share for at least 5 years - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - PASS
|Value Based on 3% Growth||$44.23|
|Value Based on 0% Growth||$25.93|
|Market Implied Growth Rate||4.09%|
|Net Current Asset Value (NCAV)||-$20.20|
Balance Sheet - 10/31/2013
Earnings Per Share
Earnings Per Share - ModernGraham
M Dividend data by YCharts
Macy's, Inc. does not qualify for either the Defensive Investor or the Enterprising Investor. The company's current ratio is too low, it hasn't had earnings stability over the ten year period, and the PB ratio is too high for the Defensive Investor. For the Enterprising Investor, the debt level relative to the current assets is too high. As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham's methods should seek other opportunities by reviewing companies that pass the ModernGraham requirements.
From strictly a valuation perspective, the company has significantly grown EPSmg from -$2.35 in 2009 to an estimated $3.05 for 2014. This solid level of growth outpaces the market's current implied estimate for earnings growth of 4.09%, and the ModernGraham valuation model returns an intrinsic value that is well above the market price; but investors should be very cautious as the company presents a little more risk than is acceptable to Intelligent Investors.
The next part of the analysis is up to individual investors, and requires discussion of the company's prospects. What do you think? What value would you put on Macy's, Inc.? Where do you see the company going in the future? Is there a company you like better?
Disclosure: The author did not hold a position in Macy's, Inc. (M) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.