Do not count on real estate to save struggling stocks

<p>Will the new coronavirus destroy Macy’s (NYSE: M)? It seems like the consensus. The M share has fallen more than 70% since February.

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But the retailer’s problems go beyond short-term losses from store closures. As our own Matt McCall recently wrote, the downturn in retail is a megatrend that will not go back. With the pandemic planned to accelerate their long-term decline, it seems to be written on the wall for Macy’s.

Sure, the company’s large property holdings can save the day, but this may not be enough to stop the inevitable. It’s not just big-box stores like Wal-Mart (NYSE: WMT) that eat their lunch anymore. The growing dominance of Amazon (NASDAQ: AMZN) and other e-commerce giants comes at their expense.

So, what’s up with M stock? Compared to “old school” competitors such as JC Penney (NYSE: JCP), the company looks like a blue chip. But that does not say much. The damage from the pandemic, together with being on the wrong side of retail disruptions, means that shares may fall further from today’s already depressed prices.

On the other hand, the shares have a chance to come back. By mortgaging their property holdings, the company can ride things out. Just surviving the maelstrom can send stocks at much higher prices than where it trades today. Macy’s can go either way from here.

How M Stock could bounce back

As mentioned above, valuable property holdings can be the key to Macy’s survival. Many of these properties are located in the affluent areas of New York, Los Angeles and Washington, DC. As this applicant Alpha contributor recently discussed, these properties could total more than $ 10 billion in total.

Still, keep this in perspective. Previous estimates have estimated their value as high as $ 21 billion. It is also debatable how much these properties would fetch in a sale. Especially now, with coronavirus which means bad times for commercial real estate.

Nevertheless, this factor provides a way to recover from the recent downturns. To borrow real estate, the company can have enough money for the shops to be closed. When they reopen, cash flow may not return to normal, but it may be enough to cover their obligations.

When the retail trade recovers, the shares bounce back. Maybe not to previous highs (over $ 20 per share). But security at levels much higher than the April 22 closing price of $ 4.82 per share.

However, this scenario is no slam dunk. With a more negative view, it’s easy to see why Macy’s can go like other retail dinosaurs.

Why Macy’s could liquidate Next Sears

It’s not really fair to compare Macy’s to its dying rivals, JC Penney’s and Sears (OTCMKTS: SHLDQ). Macy’s places have a more cosmopolitan feel and offer sophisticated goods and a much more appealing atmosphere. The latter two look like part of the dinosaurs without outdated store layouts and lower quality goods.

Yet this is exactly the dealer’s question: they are stuck in the middle. Too expensive for the average American family. For down markets for rich households. Add to that the low prices and convenience online, and there is little that gives them an advantage.

The coronavirus shutdown only removes Macy’s from this former “dead end” path and throws it on the same path that JC Penney and Sears stopped taking. As early as March, Cowen analysts said the company had liquidity that lasted only five months.

The latest mortgage on property along with employee furloughs can provide more wiggle room. But the company will emerge from this outbreak with more debt and weaker sales demand. If they can not make money on their properties and cash flow does not bounce back, expect stocks to continue to tumble towards zero.

My take on M Stock? Sit here

Today’s crisis provides many opportunities to buy quality stock for the cheap. Macy’s is not one of those screaming purchases. While shares are being sold at a hefty discount to the company’s underlying properties, it’s not as if they can loosen the properties today and suddenly have $ 10 billion at their disposal.

In a stronger economy, buyers demanded for such properties. But now? Not so much. Add current and future challenges from coronavirus, and M stocks may fall at even lower prices. Conclusion: it is best to place it here.

Thomas Niel, contributor to InvestorPlace, has been writing a stock analysis for web-based publications since 2016. At the time of writing, Thomas Niel had no position in any of the above-mentioned securities.