Investors May Be Underestimating Macy's Recovery Potential

Macy's Inc M has lost nearly 30 percent over the past year, but now is a good time to buy, at least according to Paul Trussell of Deutsche Bank.

In a report on Monday, Deutsche Bank's retail analyst upgraded Macy's stock to Buy from Hold with a price target raised to $45 from a previous $40.

Trussell stated that Macy's fourth quarter and 2017 GPM (gross profit margin) will benefit from upcoming initiatives and this isn't fully recognized by Wall Street. Specifically, the analyst highlighted staffing investments in top stores, an improving fine jewelry strategy and home store improvements. In addition, the analyst's checks at Last Act looked "busy" and expanding beyond apparel while online traffic has seen year-over-year growth based on comScore data.

The analyst's optimism comes at a time when many retailers aren't fully maximizing mobile initiatives.

Heading into the fiscal fourth quarter, Trussell's GPM estimate is 90 basis points above the Street's 38.1 percent estimate as the company is doing a good job in efficiently clearing excess inventory through Last Act. In addition, the company has overseen fewer but stronger promotional events in the quarter.

For the full fiscal year 2017, the analyst is expecting Macy's same-store sales growth to rise 0.3 percent and the company can "handily" achieve this metric.

Bottom line, Macy's $45 price target is based on a 12x multiple on the analyst's fiscal 2017 earnings per share estimate of $3.75 and is a slightly premium to the stock's three-year average multiple of 11.5x and above its peers to reflect the momentum of a recovery.