A Profitable Opportunity In This Crushed Giant

The best investments are often those that other investors have given up on.  Sometimes a company’s share price gets beat down mercilessly until even the strongest bull proponents begin to question their stance.

There is usually an excellent reason for the share price smack down.  It could be any number of factors from a series of weak quarterly reports to untrustworthy management.  Stocks can be beaten down even from a simple short-term consumer shift away from the company’s products or services.

smackdown

Sometimes the beat down company’s true value, historical significance, and future prospects are completely ignored by most investors.  Investors like to buy stocks that are moving up, even if the upward move is not supported by fundamentals.  It is very difficult to buy a stock that is downward trending despite bullish attributes.

The investors who step outside of normal behavior of only buying strength are called value investors.  Value investors seek stocks that are priced below the true value of the company.  Investopedia defines value investing as buying a stock for less than its intrinsic value.

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Investopedia goes on to explain that the big problem for value investing is estimating intrinsic value. Remember, there is no “correct” intrinsic value. Two investors can be given the exact same information and place a different value on a company. For this reason, another central concept to value investing is that of “margin of safety”. This just means that you buy at a big enough discount to allow some room for error in your estimation of value.

Also, keep in mind that the very definition of value investing is subjective. Some value investors only look at present assets/earnings and don’t place any value on future growth. Other value investors base strategies completely around the estimation of future growth and cash flows. Despite the different methodologies, it all comes back to trying to buy something for less than it is worth.

value forbes headline

We have discovered a stock that is in the deep value zone that most investors have given up on.  In fact, the shares are down 44% so far this year alone!

I am not talking about some tiny penny stock or sketchy high tech company.  This company has been around since the 1800’s and boasts a market cap of $12.7 billion!   It has been a leader in U.S. retail for well over a century, yet investors have truly thrown in the towel on the shares.

When you consider that the company owns $21 billion in real estate that it has hired a developer to help design a strategy to monetize these assets, the true value of the company becomes apparent.  This isn’t just speculation, the retailer already has sold locations in Seattle and Brooklyn.

In addition, back in July, activist fund Starboard Value announced in holds a stake in the company and wants to spin-off the real estate assets into a REIT.  Investors loved this idea and sent the shares higher by 8% on the news alone!

However, the jubilation was short-lived with management stating its opposition to the idea in its third quarter report.  Not to mention the fact that the third quarter report was so grim that shares fell another 14% deeper into the value zone upon its release.

In case you haven’t guessed it yet, the retailer I am talking about is Macy’s (NYSE:M)     

macys                                                                             

Macy’s shares are now trading in the deep value zone and will make a great investment for value seekers who are not afraid of buying on the way down.  Let’s take a closer look.

Macy’s, Inc. is one of the nation’s premier omni-channel retailers, with fiscal 2014 sales of $28.1 billion. As of April 4, 2015, the company operates about 900 stores in 45 states, the District of Columbia, Guam and Puerto Rico under the names of Macy’s, Bloomingdale’s, Bloomingdale’s Outlet, Macy’s Backstage and Blue mercury, as well as the macys.com, bloomingdales.com and bluemercury.com websites. Bloomingdale’s in Dubai is operated by Al Tayer Group LLC under a license agreement. Macy’s, Inc.’s diverse workforce includes approximately 166,900 employees. Prior to June 1, 2007, Macy’s, Inc. was known as Federated Department Stores, Inc. The company’s shares are traded under the symbol “M” on the New York Stock Exchange.

bloomingdales

Despite the dire third quarter results, 2014 results were solid as comparable sales on an owned plus licensed basis grew by 1.4 percent, and by 0.7 percent on an owned basis.

This was Macy’s fifth consecutive year of comparable sales growth. Macy’s, Inc.’s total sales have grown by nearly $5 billion over the past five years, even with a somewhat smaller portfolio of stores, as the company has embraced an omnichannel approach to business. Adjusted EBITDA as a percent to sales was 14 percent, rising from 13.6 percent in 2013 – and up for the fifth consecutive year.

Reaching the 14 percent level has been a long-standing goal, and we fully expect to remain among the most profitable retailers.

Even the earnings per diluted share were $4.40, an increase of 10 percent from $4.00 in 2013, excluding certain items (merchandising and marketing restructuring, store and field adjustments, store closings and a premium for early retirement of debt in 2014; impairment, store closings and other cost initiatives in 2013). On this basis, earnings per share rose by double digits for the sixth consecutive year. Including these items, earnings per diluted share were $4.22 in 2014, up from $3.86 in 2013.

Perhaps most bullish of all, Return On Invested Capital – a key measure of how efficiently the company uses its capital – rose again in 2014 to 22.4 percent, up from 21.5 percent in 2013. This was our sixth consecutive year of improvement in ROIC.

Macy’s just doesn’t sit on the bench awaiting changes.  It is aggressively working to consistently improve its bottom line

In 2014 the company, the company opened three new stores and closed 20 stores. Macy’s opened new stores in Sarasota, FL; Las Vegas, NV; and The Bronx, NY. Macy’s closed stores in Phoenix, AZ; Cupertino, CA; Woodland Hills, CA (2); Bradenton and Port Richey, FL; Southfield, MI; Greensboro, NC; Ledgewood, NJ; DeWitt and Schenectady, NY; Columbus, Richmond Heights and Springfield, OH; York, PA; and Memphis, TN. In addition, Macy’s combined three stores into two in the same mall in Torrance, CA, and consolidated two stores into one in the same centers in Minnetonka, MN, Houston, TX, and Arlington, VA.

Future new stores announced to date include Macy’s in Ponce, PR, in fall 2015, Kapolei, HI, in fall 2016, and Miami in fall 2017. A replacement store in Los Angeles, CA, also is planned to open in fall 2016.

macy ceo

Most unique the company is focused on localizing the content of each store to match the demographics of the customers.  This is a very niche strategy that differentiates Macy’s from its competition.

Macy’s has plans to operate internationally due to the success of its internet business shipping products to over 100 nations.

The company recently stated, “We have learned that consumers worldwide know Macy’s and Bloomingdale’s, and they like what they see. We are continuing to analyze various markets to determine what might be next. We are moving fast to begin testing Macy’s off-price stores in fall 2015. Note that we currently have 13 Bloomingdale’s Outlet stores (with a 14th to open in fall 2015), and we are excited about the growth potential of this channel. We now are structured to generate and pursue multiple new ideas, all underpinned by a test-and-learn methodology that maximizes upside opportunity while minimizing risk.

There is no question that Macy’s shares have set up to be an ideal buy opportunity for the extreme value focused investor.