International Research Journal of Applied

Finance$$ISSN $22296891$Vol$.$ VI Issue $8$ August,

$2015$

Case Study SeriesA Stock Valuation Case: An Application of the $$Method of

Comparables$$ for Macy$$s SharesHalil D$.$ Kaya$*,$Julia S$.$ KwokAbstractThe primary focus of this case is the application of the $$Method

of Comparables$$ in the estimation of the value of a security. An

investment decision will be made based on the comparison of the

selling price and the estimated value. A security will be good for

purchase if the estimated value is higher than the market price.

This method utilizes basic financial ratios that are commonly

provided by financial web sites. First, using Yahoo Finance

website, the pricing, sales, book value of equity and shares

outstanding data are collected for both the target firm and the

competitor firms. Then, the pricing multiples $($i$.$e$.$ price earnings

ratio, price to sales ratio and price to book ratio$)$ of the

competitors are calculated. After that, those multiples along with

the target firm$$s earnings, sales, book value and shares

outstanding data are used to estimate target firm$$s share value.

The case also examines the impact of treating $$negatives$$ in the

data. Students will learn that replacing negative earnings with

zeros tend to induce less bias in target firm$$s value estimation

than excluding the $$negative$$ data altogether.IntroductionMarch $14,2015$ was a sunny day. Mary took advantage of the nice

weather to have lunch at the Mall. On her way back to work, she

walked by Susan$$s investment office. Susan was Mary$$s college

roommate. They both liked shopping together to find new fashionable

clothes. Looking at her watch, Mary realized she had half an hour

to spend. She thought she would drop by and say hello to Susan.The Performance of Macy$$s$$Hi$,$ Susan, how are you?$$ How is your business?$$ said

Mary.$$ Susan was a recent finance graduate. Susan

replied, $$I am doing fine. Thank you. After so many years, the

market is still recovering from the mortgage crisis; many investors

have been buying back stocks that they have sold during the crisis.

What are you up to$?$I want to start my investment in securities$,$

too. I have a couple thousand dollars, would Macy$$s be a good stock

to invest in now? That was our favorite store to shop among all of

the department stores,$$ Mary exclaimed. She added, $$Also$,$ I read

from Motley$$s Fool$$s article on Macy$$s today about its earnings per

share growth for the last $16$ quarters$($Zahid Waheed, $2014).$In response to Mary$$s questions, Susan checked the monthly

adjusted returns of Macy$$s in Yahoo Finance. She found that, since

March $2010,$ Macy$$s stock price had an average annual increase of

$23\mathrm{.}5\%$ over the last $5$ years. The stock rose from $$19\mathrm{.}98$ to $$57\mathrm{.}38.$

Susan then told Mary that Macy$$s was indeed a growing stock. She

added that its success could be attributed to the omni$-$channel

integration, e$-$commerce and magic selling strategies which allowed

merging of sales channels, online shopping and better customer

care. Since investment strategy $101$ is to buy low, and sell high,

given Macy$$s stock price had been going up$,$ Susan was not sure

whether Macy$$s was currently overvalued or undervalued by the

market.The Method of ComparablesSusan remembered her class lecture on the two types of valuation

of stocks, namely absolute and relative evaluation. The absolute

evaluation focuses on finding the intrinsic value of the security

based on fundamentals. That involves more complicated models of

discounting cash flows from dividends, operations and residual

income.On the other hand, relative evaluation is quick and easy to use.

It assumes two similar securities should sell for one price in an

efficient market, i$.$e$.$Law of One Price.$$ So an analyst can

estimate its stock price by multiplying target company$$s specific

earnings, sales and equity value data by the earning, sales and

equity $$per share$$ financial multiples of its competitors.Since Mary was not familiarized with financial models, Susan

decided to use the easy$-$toperform$-$and$-$analyze $$Comparables Method$$

to estimate the relative value of Macy$$s stock.The Financial DataDillards, JC Penney and Nordstrom were selected as competitors

of Macy$$s as they were all in retail department store business.

Susan would need some financial data regarding these companies. She

went to SEC$$s $($i$.$e$.$ Securities and Exchange Commission$)$ website and

downloaded these companies$$ most recent balance sheet and income

statement data. Out of those statements, she knew that she would

need the EPS $($i$.$e$.$ earnings per share$),$ the sales number, the

number of outstanding shares, and the book value of equity. She

also knew that she would need the current share price for each

company. After some work, she had found all the necessary

information to run the analysis. Below were the data that she had

gathered:All data are in US$ except for the number of outstanding shares.

The share price as of March $15,2014$ is shown in the first column.

The $$Earnings per share$$ is shown in the second column. The third

column reports the book value of equity. The last column shows the

number of outstanding shares.FirmP $($$$)$EPS $($$$)$Sales $($$$)$BV of equity $($$$)$# of sharesMacy's$58\mathrm{.}583\mathrm{.}9327,931$ mil$\mathrm{.}6,249$ mil$\mathrm{.}378\mathrm{.}3$ mil.Dillard's$90\mathrm{.}617\mathrm{.}106,532$ mil$\mathrm{.}1,992$ mil$\mathrm{.}45\mathrm{.}6$ mil.JC Penney$8\mathrm{.}71-5\mathrm{.}5711,859$ mil$\mathrm{.}3,087$ mil$\mathrm{.}249\mathrm{.}3$ mil.Nordstrom$61\mathrm{.}333\mathrm{.}7712,166$ mil$\mathrm{.}2,080$ mil$\mathrm{.}194\mathrm{.}5$ mil.The DecisionSusan thinks that the following steps would be necessary to

perform the analysis:$1.$Based on the data above, calculate Sales per share, BV of

equity$/$share values of all firms. Note that EPS is directly

given$\mathrm{.}2.$Calculate P$/$E$,$ P$/$Sales$,$ and P$/$B for all of Macy$$s competitors

based on the data obtained$\mathrm{.}3.$Find the average of the P$/$E$,$ P$/$Sales$,$ and P$/$B multiples for

the three competitors$\mathrm{.}4.$Multiply those averages calculated in step $3$ with Macy$$s EPS,

Sales per share, and BV of equity$/$share values, respectively to get

three value estimates for Macy$$s shares$\mathrm{.}5.$The average of the three estimates would then be Susan$$s best

estimate of Macy$$s value per share.answer # $1-5$ please