Citi Upgrades Macy's To Buy, See Company As A 'Stronger Horse In The Race'

Although the structural challenges being faced by departmental stores are likely to be long term, Citi’s Paul Lejuez believes Macy's Inc M is taking the right steps for its business, which were likely to ease pressure in the medium term.

Lejuez upgraded the rating on the company from Neutral to Buy, with a price target of $44.

“With an attractive FCF and dividend yield, we believe the stock has support that makes the risk reward attractive at current levels, particularly considering the opportunity to improve the business in 2H16/1Q17 relative to 2H15/1Q16,” the analyst mentioned.

Related Link: What Do Macy's 100 Store Closures Mean For The Company?

Taking The Right Steps

Lejuez believes that structural challenges to departmental stores, such as having too many stores of selling “other people’s stuff,” are likely to persist, Macy’s “gets it” and has ben rationalizing its store base much faster than its peers.

This positions the company better to compete in a tough environment.

“The move also shows mgmt is thinking the right way strategically about how to enhance shareholder value longer term, as many stores to close are not earning an adequate ROIC,” the analyst pointed out.

Attractive Valuation

Lejuez also noted that Macy’s was trading at among the lowest multiples in Citi’s coverage, although the company had among the best free cash flow yields of 11 percent and dividend yield of 4.4 percent.

“Lastly, while we do not factor the value of its real estate into our valuation, we do believe it provides some downside support to the stock as we expect the company to continue to find ways to enhance shareholder value with real estate transactions,” the analyst added.

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