Since fall fashion season is here, and just in time for the Macy's Herald Square $400 million renovation debuting the Herald Square Cafe, we thought we would analyze Macy's (M) through the lens of FAST Graphs™. For the prudent investor seeking dividend income, this might be an opportune time to take a closer look at this currently undervalued company.
About Macy's, taken directly from its website:
Macy's, the largest retail brand of Macy's, Inc., delivers fashion and affordable luxury to customers at more than 800 locations in 45 states, the District of Columbia, Puerto Rico and Guam. Macy's stores and macys.com offer distinctive assortments including the most desired family of exclusive and fashion brands for him, her and home.
Earnings Determine Market Price
The following earnings and price correlated FAST Graphs™ clearly illustrates the importance of earnings. The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph, the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.
Earnings and Price-Correlated Fundamentals at a Glance
A quick glance at the historical earnings and price correlated FAST Graphs™ on Macy's shows a picture of undervaluation based upon the historical earnings growth rate of 6.2% and a current P/E of 12.7. Analysts are forecasting the earnings growth to continue at about 14.4%.
Macy's: Historical Earnings, Price, Dividends and Normal P/E Since 1998
Click to enlarge images.
Macy's Performance Table
The associated performance results with the earnings and price correlated graph, validates the principles regarding the two components of total return: capital appreciation and dividend income. Dividends are included in the total return calculation and are assumed paid, but not reinvested.
When presented separately like this, the additional rate of return a dividend paying stock produces for shareholders becomes undeniably evident. In addition to the 4.3% capital appreciation (green circle), long-term shareholders of Macy's, assuming an initial investment of $1,000, would have received an additional $145.83 in dividends (blue highlighting) that increased their total return from 4.3% to 4.9% per annum vs. 3.5% in the S&P 500.
The following graph plots the historically normal P/E ratio (the dark blue line) in conjunction with 10-year Treasury note interest. Notice that the current price earnings ratio on this quality company is as normal as it has been since 1998.
A further indication of valuation can be seen by examining a company's current price-to-sales ratio relative to its historical price-to-sales ratio. The current price to sales ratio for Macy's is 0.61, which is historically normal.
Looking to the Future
Extensive research has provided a preponderance of conclusive evidence that future long-term returns are a function of two critical determinants:
1. The rate of change (growth rate) of the company's earnings
2. The price or valuation you pay to buy those earnings
Forecasting future earnings growth, bought at sound valuations, is the key to safe, sound, and profitable performance. The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent commonsense investing decisions.
The consensus of 21 leading analysts (light purple highlighting) reporting to Capital IQ forecast Macy's long-term earnings growth at 14.4% (orange circle). Macy's has medium long-term debt at 53% of capital (red circle). It is currently trading at a P/E of 12.7, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Macy's True Worth™ valuation would be $98.31 at the end of 2017 (brown circle on EYE Chart), which would be a 19.4% annual rate of return from the current price (yellow highlighting).
Earnings Yield Estimates
Discounted Future Cash Flows
All companies derive their value from the future cash flows (earnings) they are capable of generating for their stakeholders over time. Therefore, because earnings determine market price in the long run, we expect the future earnings of a company to justify the price we pay.
Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low-risk Treasury bonds. Comparing an investment in Macy's to an equal investment in 10-year Treasury bonds illustrates that Macy's expected earnings would be 10.3 (purple circle) times that of the 10-year T-Bond Interest. (See EYE chart below.) This is the essence of the importance of proper valuation as a critical investing component.
Summary and Conclusions
This report presented essential "fundamentals at a glance" illustrating the past and present valuation based on earnings achievements as reported. Future forecasts for earnings growth are based on the consensus of leading analysts. Although with just a quick glance you can know a lot about the company, it's imperative that readers conduct their own due diligence in order to validate whether the consensus estimates seem reasonable or not.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation. A comprehensive due diligence effort is recommended.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.