This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headlines feature picks from the retail industry, where Macy’s, Inc. (NYSE:M) and Nordstrom, Inc. (NYSE:JWN) have both just suffered downgrades, while newcomer RetailMeNot , on the other hand, picks up a new buy rating. Let’s take those one at a time.
No more magic at Macy’s, Inc. (NYSE:M)
Analyst Maxim Group took an intense dislike to both Macy’s, Inc. (NYSE:M) and Nordstrom this morning, announcing downgrades for each. In Macy’s, Inc. (NYSE:M) case, it’s a downgrade to “hold,” with the analyst warning of “weak apparel sales and a promotional environment” in retail generally, while opining that Macy’s, Inc. (NYSE:M) in particular looks “fully valued” and unlikely to move higher.
Indeed, with Maxim now cutting its profits estimate at Macy’s, Inc. (NYSE:M) to $0.74 for the second quarter, $3.91 for the full year, and $4.29 next year, Maxim might even argue that the shares could move lower instead… but I don’t think so.
Consider: At 14 times earnings today, Macy’s shares really don’t look all that overvalued. True, Maxim’s new earnings estimate suggests profits will grow only 10% between this year and next. However, the consensus of analysts who follow the stock is that long-term growth will average 13% annually. Add in a modest 2.1% dividend yield, and 14 times earnings really doesn’t seem like too much to pay for the stock.
The more so when you consider how much more real free cash flow Macy’s generates than it gets to report as GAAP earnings. Over the past year, Macy’s generated $1.7 billion in free cash flow — 24% more than reported GAAP net income. With a resulting price-to-free cash flow ratio of less than 11, I think the stock is bargain priced at 13% long-term growth — or with the dividend, even at 10%.
Maxim immune to Nordstrom, Inc. (NYSE:JWN)‘s “Youphoria”
Maxim has similar reservations about Nordstrom, Inc. (NYSE:JWN). This morning, the analysts downgraded Nordstrom, Inc. (NYSE:JWN) from “buy” to “hold,” lowering its price target to $63 in the process. Quoted on Streetinsider.com, Maxim again cited “low apparel sales” as underlying its downgrade, again cut its earnings estimates (to $3.77 this year and $4.38 next year), and — just as with Macy’s — warned that Nordstrom, Inc. (NYSE:JWN) shares are looking “fully valued.”
Here, I think the analyst has a stronger case. Priced north of 16 times earnings and growing less than 12% per year, Nordstrom, Inc. (NYSE:JWN) is at once more expensive than Macy’s and a slower grower.