MGMT 315: Financial Valuation Project
Ashli Edwards, Xiang Li, and Katerina Goudouros
Table of Contents
• Introduction to Macys…………….......…………..Ashli Edwards
• Company Description
• History
• SWOT Analysis
• Department Store and Risk Analysis…………………
• Financial Analysis………………………………………………Ashli Edwards
• Valuation
•
•
•
•
•
•
•
Beta………………………………………………………..………Ashli Edwards
Capital Asset Pricing Model……………………………..Xiang Li
Dividend Discount Model………………………………..Katerina Goudouros
Weighted Cost Of Capital………………………………..Xiang Li
Free Cash Flow Model…………………………………….Ashli Edwards
Stock Valuation………………………………………………Xiang Li
Valuation Using Multiples………………………………Katerina Goudouros
• Recommendations and Conclusion
INTRODUCTION TO MACY’S
Company Description
• Macy’s Inc. is America’s premier retail department store
headquartered in Cincinnati, Ohio in the United States.
• A business to consumer firm selling merchandise to demographic
population consisting of teens, adults, and children.
• Product mix includes a wide variety of merchandise and services
including apparel, home décor, appliances, and cosmetics as well
as in-store services like bridal and baby registry.
• Operates in almost 850 stores within the United States, District
of Columbia, Guam, and Puerto Rico and employs approximately
172, 500 people.
• Publicly traded under the symbol “M” on the New York Stock
Exchange.
History
• 1859: Originally, A fancy dry goods
store in New York City
• 1902: Moved to present trademark
location on Herald Square
• 1922: Went public on the NYSE
• 1924: Launched the annual tradition
of Macy’s Thanksgiving Day Parade
• 1946: Launched the first annual
flower show
• 1994: Merged with Federated
Department Stores
• 2001: Absorbed Stern’s Department
Stores
• Present: Owns 850 + stores
nationwide and U.S. surrounding
territories
SWOT ANALYSIS
Strengths
 Market position
 The Macy’s brand
Opportunities
 Expansion Abroad
Weaknesses
 Loss of regional brand value
Threats
 Industry competition
 Governmental regulations
DEPARTMENT STORE INDUSTRY AND RISK
ANALYSIS
Department Store Industry and Risk Analysis
Department Store Industry
Risk Analysis
• Economic Condition
• Industry Risk
• J.C. Penny, Saks, Dillard’s
• Theft
• Customer Data Hacking
• Terrorism
• Sales declined 40% after
9/11
FINANCIAL ANALYSIS
2011
2012
2013
Industry
Average
Liquidity
Current Ratio
1.40
1.55
1.52
1.70
Quick Ratio
0.51
0.43
0.47
0.60
7.06
Asset Management
Inventory
3.08
3.12
3.01
Days Sales
Outstanding
5.09
4.89
5.72
Total Assets
Turnover Ratio
1.20
1.32
1.29
2.70
Debt Management
Total Debt Ratio
44.80%
47.00%
44.65%
22.90%
Times Interest Earned
5.39
6.26
6.87
8.9
Profitability
Profit Margin
4.76%
4.82%
5.32%
2.90%
Return on Assets
5.88%
6.20%
6.97%
8.80%
Return on Equity
21.91%
22.28%
24.16%
21.10%
Market Value Ratio
P/E
VALUATION ANALYSIS
Beta
0.91
 In order to find the Macy’s beta, we gathered five years of historical stock
from Macy’s and S&P 500 returns to run regression. Using Macy’s as our yvariable and the market portfolio as our x-variable to run the regression, we
found Macy’s beta as 0.91. Since Macy’s beta is less than the market beta of
1.0, this means that Macy’s is less risky than the average firm in the market.
Capital Asset Pricing Model
Risk Free Rate (
)
30- year Treasury bond
yield 3.07%
Risk Premium
5%
Beta ( ))
0.91
• Calculate Return on Equity using CAPM:
ri = 3.07% + (5%) x (0.91)
ri = 7.62%
Dividend Discount Model
Dividend Discount Model
(Notes)
Weighted Average Cost of Capital
• S&P Credit Rating: BBB+
• Cost of Debt = 7.01%
• 3.94% + 3.07% = 7.01%
• Spread: 3.94%
• 30-year Treasury Bond Yield: 3.07%
• Cost of Equity = 7.62%
• CAPM: ri = rf + (rm - rf)ßi
• ri = 3.07% + (5%) x (0.91) = 7.62%
Weighted Average Cost of Capital
Weighted Average Cost of Capital Data
Market Value of Debt (Long Term Debt )
6,728 Million
Market Value of Equity
22,642 Million
Market Price per Share x # of Outstanding Stock
$62.05 x 364.9 = 22,642 Million
Total Value
29,370
Debt to Value
6,728 Million/29,370 Million
= 22.91 %
Equity to Value
22,640 Million/29,370 Million
= 77.09%
WACC
= rD*(1-T)*(D/V) +r rE *(E/V
=7.01% *(1-35%) + 7.62%*77.09%
= 6.92%
Industry WACC (provided by NYU Stern)
7.87%
Free Cash Flow Model
• Revenue is projected using 2.40% growth rate from Yahoo!
Finance
• Total expenses is 84.88% of revenues (5-year average)
• Depreciation and Amortization is 4.48% of revenue (7-year
average)
• Net interest expense is assumed to be constant at 507 (6-year
average)
• Tax Rate is constant at 35%
• Total other Non-Cash Adjustments is -1.13% of revenue
• CAPEX/Net Cash Flow from Operating Activities is 22.99%
• Other Investing Activities/Net Cash Flows from Operating is 5.42%
Free Cash Flow Model
• Horizon Year : 6
• Industry WACC: 7.87% (NYU Stern)
• Terminal Growth Rate: 3.27% (Trading Economics)
Timeline
Unlevered Free
Cash Flow
Terminal Value
1
1,981
2
2,026
3
2,072
4
2,119
5
2,167
6
2,216
49,745.16
7
2,288
Free Cash Flow Model
Terminal Value
= (2,216*3.27%)/(7.87% - 3.27%)
= $49,745.16
Firm Value
= $41,258
(+) Cash and Marketable Securities
= $2,273
(-) Long Term Debt
= $6,728
Equity Value
= $36,803
Stock Price, 2014
= $36,803/364.9
= 100.86
Stock Valuation
• Our calculated stock price: $100.86
• Market price: $62.05
• UNDERVALUED
• Overestimated revenue growth rate
• LOW CAPEX/Net Operating Cash Flow:
29.99%
Valuation Using Multiples
RECOMMENDATIONS AND CONCLUSIONS
Recommendations & Conclusions
• By using of the three valuation methods, we calculated the
average stock price for Macy’s to be $98.79.
• The intrinsic stock price of $98.79 is higher than the market
price. This indicates that the market price trading today is well
undervalued.
• Overall, we conclude it is undervalued by $36.74. Therefore, we
believe Macy’s is a good potential investment and recommend
buying their stock.