There must be something in the air this holiday season as one buyout buzz story after another permeates the financial headlines. First it was Paramount Global (NASDAQ:PARA), followed by United States Steel (NYSE:X). Now Macy’s (NYSE:M) is the belle of the ball, and short-term stock traders are scrambling to buy some shares.
It’s unexpected to see Macy’s get so much positive attention, but this has been a year of oddities, so we can just add this news item to the list. Let’s delve into the buzz and the data and see if Macy’s stock is worth holding through the holidays.
Macy’s stock goes vertical
Even before Macy’s stock gained 20% on Monday, it was already on track to double from November’s $10 bottom. It just goes to show that once the market decides it likes a stock, it really likes that stock.
Short-seller capitulation likely accounts for part of the rally in Macy’s stock. However, there are also some perfectly valid reasons for stock traders to favor the department store chain now.
First of all, Macy’s presents a compelling value proposition for investors. Recently, the company’s GAAP-measured, trailing 12-month price-to-earnings (P/E) ratio was around 7, versus the sector median P/E ratio of 15.25. In addition, Macy’s has price-to-sales (P/S) and price-to-book (P/B) ratios that are considerably lower than the respective sector medians.
Furthermore, Macy’s offers a generous forward annual dividend yield of 3.85%. For comparison, the average dividend yield in the consumer-cyclical sector is around 1%.
Macy’s also delivered a blockbuster set of data for its most recently reported quarter. Granted, this was prior to the holiday season, but it’s still impressive that Macy’s generated $4.86 billion in third-quarter sales, while Wall Street had only expected $4.78 billion.
Not only that, but Macy’s reported a surprise net profit of 21 cents per share in the third quarter, even though analysts only thought the company would break even. Additionally, Macy’s was fairly well stocked for the holidays as its merchandise inventories were only down 6% year over year, “reflecting ongoing disciplined inventory management.”
Thus, Macy’s CEO Tony Spring earned the right to boast that his company had “delivered better-than-expected top- and bottom-line third-quarter results and [is] entering the holiday period in a healthy inventory position.” It’s a good thing that Macy’s was stocked up as consumers went on a major shopping spree on Black Friday.
In other words, there was a prime setup for Macy’s to shine in late 2023 after a year of the “Magnificent Seven” technology names taking the spotlight. The stock market largely left Macy’s behind until November, but short sellers ran for cover when investors flipped a mental switch and suddenly decided to rotate into retail stocks generally and Macy’s stock in particular.
Bring on the buyout buzz
For value seekers and dividend collectors, the bull case for Macy’s stock has been strong all year long. However, momentum-focused traders are now jumping into the fray. Again, a 20% single-day share-price move speaks volumes.
This panic-buying spree wasn’t just about Macy’s yield and value proposition. A Wall Street Journal report served as another major catalyst on Monday, and Macy’s stock began trending for the day.
Arkhouse Management and Brigade Capital Management reportedly submitted a joint $5.8 billion bid on Dec. 1 to buy out Macy’s. The current terms of the buyout bid apparently indicate that Macy’s would be taken private.
Here’s an interesting coincidence. The acquisition offer reportedly values Macy’s at approximately $21 per share. Meanwhile, Macy’s jumped to nearly $21 on Monday.
Why would these financiers want to buy out Macy’s? The retailer’s real estate may be the biggest motivator.
“Macy’s has some valuable real estate, including its Herald Square location, which makes Macy’s more attractive as a target. Although the company has monetized some of its real estate, there is likely more that can be done,” Citigroup (NYSE:C) analyst Paul Lejuez explained.
Now current and prospective investors just have to wait and see what happens next. Macy’s hasn’t provided a definitive response yet, but the forward-looking market went ahead and bought the stock anyway. Still, given Macy’s attractive value-and-yield combo, it’s still not a terrible idea to own a few shares, regardless of how the buyout offer pans out.