Hi I’m Jimmy in this video we’re looking at Macy’s ticker symbol M, now Macy’s stock has really been beaten down recently down more than 50 percent over the past year. And that’s accounting for their very impressive dividend yield of right around 10 percent. So why did Macy’s stock fall. How much do we think it’s worth now and do we think it’s a good buy at this point. OK. So let’s take a peek. So I’ll start by looking quickly at some other numbers and then we’re looking at one of the keys to an investment in Macy’s and what it could mean for us if we do decide to invest. OK. So let’s start with Macy’s revenue. This is Macy’s revenue going back to 2013. And as we could see it’s been declining and analysts seem to think that it will continue to decline for at least the next couple of years. Those are the green bars. Those analyst estimates and then what would jump over earnings per share. Well here we can see a somewhat similar story. Now we may notice the jump in 2018 and that is that jump is a little bit unusual because taxes help boost their profits that year. And so did the sale of some of their real estate assets. And this is actually quite important. We’re gonna come back to this in a minute but for now I thought it was important for us to just see where Macy’s earnings per share really stand and analysts seem to be expecting that earnings per share is going to continue to decline at least slightly over the next couple of years. OK now let’s get to the heart of Macy’s business. So this is a chart of Macy’s store count. The blue lines of the classic Macy’s department stores the red lines are their cosmetics company. That’s called Blue Mercury I believe that bought them in 2014. And the smaller green bars. Well those are the Bloomingdale’s outlets. They also have traditional Bloomingdale stores but those that store count hasn’t changed all that much. So I kept it off this chart to keep it from getting to crime. Now let’s add some numbers so we can see how these and get a clearer look at what’s happening here. So as you can see the department store numbers have gradually declined. Now I don’t think this is strictly a bad thing. If Macy’s is closing their underperforming stores and keeping their best performers Well in theory once this is all shaken out. Well Macy’s investors could be served quite well for this shift. OK. Now this is where things get interesting. So as of the end of twenty nineteen This is Macy’s stores broken down by ownership. And as we could see Macy’s leases a decent number of stores they have ground leases of a bit more than one hundred or so stores and then they partly own a couple of different stores. And then that brings us to a huge part of Macy’s business and that is the stores that they own. So Macy’s owns some amazing real estate properties. Many of their stores are larger than 100000 square feet. And I could imagine these properties are worth a decent amount of money. Now it’s also important for us to realize that as Macy’s has closed some of their stores well they’ve also been selling some of the real estate tie to those stores in an effort to raising capital to revamp their business. This is a chart of a number of owned properties that Macy’s had since 2010. And as we could see the number has been gradually declining just like the number of Macy’s stores that they manage. And I suppose that this makes a lot of sense. And if they closed stores and then they sell the properties. Well in theory the cash that they’ve received for selling those properties they could use to pay off debt or acquire new brands or new stores or upgrade current stores. Either way they get those choices because of the cash that the properties bring in for them. Now this brings us to coming up with a fair value for Macy’s stock and a look at their dividend and ultimately does it make sense to invest in Macy’s today. So this is the fair value that I came up with using the discounted cash flow valuation. So as we can see I calculated the fair value of Macy’s stock to be about 15 dollars per share. And right now Macy’s stock is trading at right around fifteen dollars per share. So let me just run through this calculation real quick and then we’ll jump in to some of the thoughts behind it. So I found analyst projections going out to 2023 for free cash flow then we use a required rate of return of 9 percent. Now that’s a bit higher than I normally like to use. But we saw their revenue we saw their profits. Those numbers are falling. So I think Macy’s stock move there’s a little more risk in it. So for me it makes sense to require a higher rate of return than I used our standard 2.5 percent for perpetual growth rate. And then we added another piece here that we don’t always use. And I think it’s important in this case. But I’ll explain why in a second. So basically we took today’s value and then we subtracted net debt. Net debt is the same as offsetting let’s say long term debt in cash offset them. You end up with net debt. Well we took that. We took the result of that divided by the shares outstanding went up for the fair value of about 15 dollars and 21 cents. Now if you’re wondering how we did this whole calculation I did a video on that specific thing. And I also have a link to this very template. I’ll email the excel spreadsheet there’s a link in the description below. Go to that link plug in your email address. I’ll send you over the template as soon as I can. Okay. So in the template and most of the time that I do DCF I don’t subtract net debt. Now if we don’t subtract net debt then in theory what we end up with is the fair value for the entire company. If we do subtract net debt then we end up with the fair value of just the equity which is the same thing as stock. So when considering our discounted cash flow valuation technique what does this really tell us. Well it should tell us how much future projected free cash flow is worth today. And since free cash flow is calculated by in theory looking at the cash generated from the operations of the business. Well in theory that would mean that this kind of cash flow should tell us the value of the operations of the business. As an example for Macy’s Well we know that Macy’s owns about half of the properties that they use for their stores. Well what if they didn’t know any of the properties and instead they leased all of the properties. Well assuming rent was somewhere equivalent to what the mortgage cost is then free cash flow wouldn’t change all that much. So this fifteen dollars and twenty one sense of fair value. Well it would be about the same again assuming the expenses were about the same since this free cash flow is generated from the operations of a business not whether or not they own the properties. But I’ve got an interesting scenario for us to consider what if Macy’s decided to spin off the ownership of the real estate into a real estate investment trust or reach for short. I’ve got a link to a rich primer video if you know to what I’ve read is but if they decided to do that let’s imagine that we are Macy’s stock investors and we get to keep our shares in the Macy’s stock as it currently stands. But we also get shares in the new read that it’s full well what do we think would happen to Macy’s stock price. Well it would probably fall. But assuming that they’re free cash flow turns out to be some more in line with what we’re saying eventually profits are going to stabilize assuming that the company can turn around the business itself the operational business. Well things would eventually stay bright stabilize and let’s pretend that the stock is worth somewhere near fifteen dollars per share or you’d lose a few dollars below that. But what about the read. Well read alone is probably worth as much as Macy’s stock is right now. They have a ton of properties. Their largest property their flagship store in New York City is an entire New York City block. It’s estimated to be worth somewhere over three billion dollars I’ve read. Plus they have another three hundred and fifty years so other large properties scattered throughout the country. Now I’m not actually proposing that Macy’s do this although I do think it would make for a very interesting twist. But I do think that Macy’s real estate the real estate that they own offers a somewhat of a floor under their stock price. And I think this could be reassuring for investors specifically investors that are looking for Macy’s impressive dividend. This is their dividend history going back to 2014 and I checked it over the past 12 months and over the past 12 months they’ve had dividend coverage ratio of more than two which tells us that Macy’s currently has more than double the profits they need to maintain this current level of dividend which is about a dollar fifty one. And given their 15 or dollar or so price currently. Well that would mean that their dividend yield is right around 10 percent. Now if we do get involved in Macy’s stock I think we need to do so cautiously. There could be some volatility even though they have a great dividend but I do fear that if they keep selling off their real estate to fund the company turnaround what is the turnaround doesn’t come anytime soon. So in theory they could be selling away that floor we mentioned just for no real good reason instead of giving up the profits of the company. But over the long run I don’t expect that to happen I expect them to maintain the best holding the best performing stores and the real estate in the north. If they already own it then on the flip side management has talked about the possibility of building a skyscraper on top of the flagship store in New York City which had help them generate even more profits and could be a great thing in the long run. Now it also gives the idea of a read spinoff a bit more credibility. But what do you think. Do you think that Macy’s is worth investing in at the current level. Does the dividend make it interesting enough to get involved. What do you think of the Reid spinoff idea or some version of that. I think that could be interesting. Let me know what you think of the comments below. If you haven’t done so yet please hit the subscribe button hit the thumbs up it really helps the videos and the channel. And thank you for sticking with me all the way into the video. I’ve seen the next video. Thanks.