Is This One Star Investors Should Place in Their Portfolios?

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future.  As 2013 begins, I would like to pinpoint on leading retailer with both physical and virtual presences under two distinct brands, Macy’s (NYSE: M).

<img src="http://stockcharts.com/c-sc/sc?s=M&p=D&yr=1&mn=0&dy=0&i=t24033401958&r=1361123729185" />

The Business:

Warren Buffett once said, “Never invest in a business you can’t understand.” This not only allows the investor to purchase a company with conviction, however also allows them to spot trends blind to unfamiliar eyes. With this in mind, investors in any company should fully understand the business model of the company. Macy’s operates physical and virtual retail destinations across the United States under the brands of Macy’s and Bloomingdale’s. As of the end of 2011, 842 Macy’s stores were scattered throughout the United States. Because of the incredibly competitive nature of the retail industry, Macy’s profit margin is only 2.39%.

Strengths:

  • Steady Revenue Figures: In 2007, Macy’s reported revenue of $26.31 billion; in 2011, the company announced revenue of $26.41 billion, representing year over year annual growth of 0.09%, and this trend of steady revenue is expected to alter into faster paced growth with projections placing 2017 revenue at $30.95 billion   

<img src="/media/images/user_13174/4_34_large.png" />

  • Institutional Vote of Confidence: 81.22% of shares outstanding are held by institutional investors, displaying the confidence some of the largest investors in the world have in the company and its future
  • Reasonable Valuation: Currently, Macy’s carries a price to earnings ratio of 12.25, a price to book ratio of 2.73, and a price to sales ratio of 0.59; all of which indicate a company trading with a fairly reasonable valuation
  • Positive Free Cash Flow Position: The company presently withholds $110 million of free cash flow on their balance sheets, which will allow the company to reward investors or reinvest in their own business
  • Brand Loyalty: The value of Macy’s brand is estimated to be $6.30 billion, and the incredible quantities of brand loyalty consumers show towards this iconic brand is undeniably a major strength of the company
  • Dividend: Presently, the company pays out quarterly dividends of $0.20, which annualized puts the dividend as yielding 2.04%

Weaknesses:

  • Complete Concentration in US: Macy’s operations are exclusively located in the United States, and this complete concentration in the US could prove to be a severe weakness in times of economic downfall especially devastating in the US
  • Relatively High Volatilely: At the moment, the company possesses a beta ratio of 1.68, which represents a company trading with relatively more volatility than the overall market, a major weakness for long-term investors
  • Margin Contraction: Macy’s profit margin has fell from 3.70% in 2007 to 3.40% in 2011 on a trailing 12 month basis, however this margin contraction trend is anticipated to reverse, with projections placing 2017’s profit margin at 6.00%
  • Net Debt: Despite possessing $2.83 billion of cash and cash equivalents on their balance sheets, the company’s debt load of $6.65 billion results in a rather substantial net debt of $3.82 billion, a major downside for investors
<img src="/media/images/user_13174/5_30_large.png" />

Opportunities:

  • Market Share: Any gain Macy’s is able to make in market share will substantially benefit the company as only a slight gain could equate to millions in sales
  • Dividend Growth: Since implementing their dividend program in 2003, Macy’s has consistently raised their dividend payouts, a trend which is highly anticipated to sustain into the future
<img src="/media/images/user_13174/6_23_large.png" />
  • Growth in Store Count: The number of stores the company operates has decreased from 850 in 2009 to 842 in 2011, however with improving economic conditions in the United States, growth in store count presents an incredible opportunity for the company
  • Innovative Product Offerings: Macy’s is consistently implementing new product lines to spark customer interest, and has recently started a loyalty program, and any further innovative product offerings could fuel sales growth

Threats:

  • Growth in Operating Expenses: Over the past five years, operating expenses have outgrown revenues marginally, and further growth in operating expenses could lead to further margin contraction
  • Decay in Consumer Confidence and Spending: When US economic conditions falter, consumer confidence and spending decay, and further decay in these vital statistics could pose a major threat to Macy’s core business
<img src="http://www.tradingeconomics.com/charts/united-states-consumer-confidence.png?s=concconf" />

Competitors:

Major publicly traded competitors of Macy’s include Saks (NYSE: SKS), J.C. Penney (NYSE: JCP), Nordstrom (NYSE: JWN), and Kohl’s (NYSE: KSS). All of these companies operate in the retail industry and compete directly with Macy’s. Saks is valued at $1.71 billion, does not pay out a dividend, and carries a price earnings ratio of 25.07. J.C. Penney is valued at $4.34 billion, does not pay out a dividend, and carries a negative price earnings ratio. Nordstrom is valued at $11.09 billion, pays out a dividend yielding 1.95%, and carries a price earnings ratio of 16.90. Kohl’s is valued at $10.66 billion, pays out a dividend yielding 2.76%, and carries a price earnings ratio of 10.65.

The Foolish Bottom Line:

Financially, Macy’s is relatively solid. The company possesses stable revenue figures, a growing dividend, and a positive free cash flow position. The company’s debt position is compensated through opportunities presented to the company in its future. While more stability may be found in Target or Wal-Mart, and more growth may be found in Costco and Amazon in the retail industry, Macy’s is a nice blend of stability and growth, and should perform in line with the market for years to come.


makinmoney2424 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus