Along with most retail and department store stocks, Macy's (NYSE:M) has surged over the last few months. The question now is whether the stock will make the next high after a small pullback.
Macy's peaked back in 2015 at over $70. The recent rally to $45 leaves the retail stock far from the peak, but should investors get out now?
Signs already exist that some rebound is occurring in retail sales after the election. Macy's reported strong Black Friday traffic, and Redbook is indicating strength in department store sales for November.
Despite a huge FQ3 miss, Macy's earnings estimates for next year are now creeping higher. The retailer took a huge step down earlier in the year, but the worst appears to be over now.
If results are going to rebound, the stock isn't expensive at all. Macy's trades at only 12x forward EPS estimates. The only justification for such a low multiple would be a continued drip lower in estimates.
On top of the earnings scenario, the retailer has an established real estate portfolio worth under most estimates more than the current stock valuation of $13.0 billion. In fact, Starboard Value LP valued those assets at $21.5 billion last year. The strategic alliance with Brookfield Asset Management (NYSE:BAM) could help to unlock some of the value in the real estate assets.
The alliance involves Brookfield working on 50 Macy's real estate assets with the purpose of improving the asset value through either additional development on unused land parcels or modification of the existing store. In other words, the assets, or at least a portion of the assets, are worth more in the hands of other retailers.
Along with the real estate assets valued at $8.5 billion in excess of the current market valuation last year by Starboard, another catalyst for domestic retailers like Macy's is the potential income tax rate cut from a Republican Congress. The retailer pays a roughly 36.8% effective tax rate now.
So not only does Macy's have the assets suggesting a higher stock valuation, but the stock trades at an attractive P/E multiple that could drop further on a big tax cut.
The key investor takeaway is that multiple catalysts exist for Macy's heading higher. Now doesn't appear to be the time to exit a position in this department store stock.
Disclosure: I am/we are 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.
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