Macy’s, Inc. (NYSE:M) shares are down more than -50.94% this year and recently increased 0.23% or $0.04 to settle at $17.57. Kohl’s Corporation (NYSE:KSS), on the other hand, is down -17.40% year to date as of 11/08/2017. It currently trades at $40.79 and has returned -2.65% during the past week.
Macy’s, Inc. (NYSE:M) and Kohl’s Corporation (NYSE:KSS) are the two most active stocks in the Department Stores industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect M to grow earnings at a 18.64% annual rate over the next 5 years. Comparatively, KSS is expected to grow at a 6.90% annual rate. All else equal, M’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 12.52% for Kohl’s Corporation (KSS). M’s ROI is 8.70% while KSS has a ROI of 8.80%. The interpretation is that KSS’s business generates a higher return on investment than M’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. M’s free cash flow (“FCF”) per share for the trailing twelve months was +0.19. Comparatively, KSS’s free cash flow per share was +0.33. On a percent-of-sales basis, M’s free cash flow was 0.22% while KSS converted 0.3% of its revenues into cash flow. This means that, for a given level of sales, KSS is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. M has a current ratio of 1.40 compared to 1.80 for KSS. This means that KSS can more easily cover its most immediate liabilities over the next twelve months. M’s debt-to-equity ratio is 1.44 versus a D/E of 0.91 for KSS. M is therefore the more solvent of the two companies, and has lower financial risk.
M trades at a forward P/E of 6.66, a P/B of 1.22, and a P/S of 0.22, compared to a forward P/E of 10.96, a P/B of 1.36, and a P/S of 0.37 for KSS. M is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. M is currently priced at a -26.02% to its one-year price target of 23.75. Comparatively, KSS is -4.61% relative to its price target of 42.76. This suggests that M is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.80 for M and 2.70 for KSS, which implies that analysts are more bullish on the outlook for M.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. M has a beta of 0.87 and KSS’s beta is 1.20. M’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. M has a short ratio of 4.64 compared to a short interest of 9.06 for KSS. This implies that the market is currently less bearish on the outlook for M.
Kohl’s Corporation (NYSE:KSS) beats Macy’s, Inc. (NYSE:M) on a total of 7 of the 14 factors compared between the two stocks. KSS is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, M is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, ATOS has better sentiment signals based on short interest.