Doing The 'Starboard Math' At Macy's: Is It Worth $125?

In a report issued Thursday, JPMorgan analyst Matthew R. Boss and the retail team look into Macy's, Inc. M’s near-term fundamentals and real estate optionality. They also look into the three pivot points to Starboard Value’s thesis.

On Wednesday, Jeff Smith of Starboard Value said, at the Delivering Alpha Conference, that Macy's is the fund’s top idea. The investor said his fund values the stock at $125.00, as its owned real estate portfolio’s value ascends to $21 billion.

“With 72% of M's market share locked up in real estate value earning ~6-6.5% today (i.e cap rate = rent subsidy), a key premise of Starboard's thesis is value creation with asset monetization (RE + CC Income Stream optimization) providing management with $8B+ in proceeds at their disposal (for share repurchase or higher return operating investments),” JPMorgan analysts explained.

Related Link: Jeff Smith Hypes Macy's At Delivering Alpha

Breaking Down The $125 Price Target

The report goes on to break down the $125 price target, which assumes an enterprise value of roughly $45 billion (versus the current $29 billion) and is based on:

1) $17 billion Opco value.

2) $8 billion in credit card value.

3) $19 billion of realized real estate value (10 percent haircut to the $21 billion value).

4) A $6 billion share repurchase plan and the pay-down of $1 billion in debt.

Pivot Points To Starboard's Thesis: Math Still Shows $100+ Value

The analysts recognize three “key pivot points to Starboard’s thesis” (beyond the management’s decision to monetize its RE):

1) EBITDA margin expansion should reach 200bps.

2) Adjusted debt/EBITDAR leverage of 3.5x, well above the management’s 2.4x-2.7x target range.

3) “Revaluation of the $775M credit card income stream (sold portfolio in FY05).

According to JPMorgan’s math, the stock is still worth more than $100. If the firm “were to take Starboard's assumptions as given, but make 3 changes: (1) Hold Operating Margins Flat (rather than 200bps expansion), (2) Hold leverage at 2.5x (rather than 3.5x), and (3) Leave CC income valuation unchanged as part of EBITDA (6.5x multiple rather than assigning 11x fin. services multiple)” they arrive at a fully baked price of roughly $100 per share, or an enterprise value of $37 billion.

JPMorgan maintains an Overweight rating and $76.00 price target on shares of Macy’s.