Macy's stock has delivered a very strong 1 year return, yet the valuation work suggests the shares may still be trading at a discount to what the underlying cash flows imply.

• Over the past year, Macy's has returned 118.2%, which puts more focus on whether recent buyers are overpaying or still getting in below intrinsic value.
• The key support for the current price is the market's view on Macy's ability to keep converting its retail footprint into steady cash flows. Any sustained pressure on consumer spending or store level profitability may weigh on how much investors are willing to pay for those cash flows.
• Macy's scores highly on valuation checks, with 5 out of 6 signals pointing to the stock screening as undervalued compared to its estimated intrinsic value and market multiples.

The issue now is whether the recent share price strength has already captured this apparent discount or if Macy's still offers a margin of safety at current levels.

Is Macy's Still Cheap on Cash Flow?

The Discounted Cash Flow (DCF) model estimates what Macy's future cash generation could be worth in today’s dollars. For Macy's, the model uses latest twelve month free cash flow of about $966 million and assumes that cash flows continue to grow from here rather than shrink.

On those assumptions, the DCF points to an intrinsic value of about $40.87 per share. That compares to the current share price and implies the stock trades at a 37.9% discount to this estimate. The implied gap suggests the market price is not fully reflecting the cash flow profile that Macy's is currently producing.

Taken together, the DCF analysis indicates that, under these assumptions, Macy's stock appears undervalued relative to the cash flows implied by this model.

Our Discounted Cash Flow (DCF) analysis suggests Macy's is undervalued by 37.9%. Track this in your watchlist or portfolio, or discover 51 more high quality undervalued stocks.

Does Macy's Look Undervalued on Earnings?

P/E is a useful cross check for Macy's because earnings are a core focus for most retail investors. It shows what the market is paying for each dollar of current profit.

Macy's trades on a P/E of about 10.0x, which is well below the Multiline Retail industry average of roughly 19.9x and also below the peer group average of about 25.9x. A tailored fair P/E for Macy's that adjusts for its size, margins and risk profile is closer to 13.2x. That is still above where the stock trades today.

The gap between the current 10.0x and the 13.2x fair multiple suggests the market is applying a heavier discount to Macy's earnings than this framework implies. If the earnings base holds up, that discount indicates there may be room for the share price to move closer to what investors typically pay for similar profit streams.

On this P/E check, Macy's stock appears undervalued compared with both its industry and its modelled fair multiple.

The Macy's Narrative: What Would Justify Today's Price?

Simply Wall St Narratives pick up where this Macy's valuation puzzle leaves off by spelling out which future paths for growth, margins and earnings would justify a higher or lower share price than today. Each one links its number to a clear view on where Macy's growth, profitability and risk might head next. This gives you something concrete to revisit as new results and news come through on the Community page.

The Macy's community is split between a view that the stock still has meaningful upside and a view that recent gains already reflect most of the good news.

Bull case: 15% undervalued

"Macy's landmark omni-channel investments and technology-driven customer experience, evidenced by record Net Promoter Scores and rising digital/customer engagement, position the company to capture disproportionate share as shopping continues shifting to hybrid in-store/online models. This supports long-term comp sales growth and higher lifetime customer value…"

Bear case: 12% overvalued

"Persistent consumer shift from physical retail to e-commerce threatens Macy's store-centric sales, especially as unit demand was noted as soft and ongoing store closures risk further top-line pressure. This could potentially erode overall revenue growth…"

Do you think there's more to the story for Macy's? Head over to our Community to see what others are saying!

The Bottom Line

Macy's still screens as undervalued on both the Discounted Cash Flow (DCF) intrinsic value estimate and on earnings multiples, which is a rare level of agreement between models. That leaves the key question of whether the current cash flow and earnings profile can be maintained as customer behaviour shifts and store level performance comes under pressure. For investors, the central issue now is whether Macy's can continue converting its retail footprint into steady cash flows that support a re rating, or whether the current discount reflects the market's assessment of the risk of weaker demand and profitability.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.