Macy's Property Portfolio Alone Is Worth Its Market Cap, Fund Manager Says

(Bloomberg) -- Macy’s Inc. shares have about doubled since Scottish Investment Trust bought in 13 months ago -- and the stock is still valued “pretty lowly,” says Alasdair McKinnon, investment manager at the fund with approximately $1.1 billion under management. McKinnon thinks the property portfolio “is worth the market cap of the company.”

Some might argue “the portfolio has no other use than as a department store,” but McKinnon tells Bloomberg in a phone interview that there are as many as three flagships that could “easily” be turned into apartments or office space. As of July 31, Macy’s was the fourth largest holding in the Scottish Investment Trust, valued at approximately 28.4 million pounds ($36.1 million), according to the website.

Macy’s market cap currently stands at $12.6 billion and the stock is trading at about 10 times earnings, with a four percent dividend yield. This compares to the price to earnings ratio on retailer Ross Stores Inc. of 23 times, J.C. Penney Co. at 57 times and Nordstrom Inc.’s multiple of 16 times, according to data compiled by Bloomberg. And then there’s Amazon.com Inc., which trades at a ratio of 110 times.

Investors are buying Amazon “without valuing it,” McKinnon says, but that won’t last forever. “There will come a time when people want to value it. That’s when you might see the money flow down the food chain” and into other retailers like Macy’s.

The big picture for Macy’s includes a continuation of the trend seen since about last Christmas, when sales had “improved and confounded market expectations,” he says.

Investor sentiment on the company’s prospects has moved from thinking Macy’s will “go bust or is in a terminal decline, to a situation where people thought Macy’s was just lucky for a month or two” but now, after the first quarter, when the department store’s comparable sales “were pretty good in a pretty tough weather environment, people started to say hey, there’s something going on here.” Shares moved higher, which ultimately spooked short investors, many of whom exited their positions.

Now, short interest is running at about 7 percent of float versus a 52-week high of 19 percent in mid-December, according to Markit data.

There continues to be a few things that should keep Macy’s on an upward path, according to the Edinburgh-based manager. The consumer environment is favorable, with a robust economy and improved job growth, Macy’s inventory levels are right and it’s providing shoppers with an experience -- the right product, “items to surprise you, the cup of coffee.”

Macy’s is up 64 percent year to date and 104 percent over the past 12 months. The company kicks off department-store quarterly reports before the market opens on August 15.

To contact the reporter on this story: Janet Freund in New York at jfreund11@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Scott Schnipper, Brad Olesen

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