With the rash of mergers among big retail chains, investors in May Department Stores (MAY ) -- plagued by poor sales for the past few years -- are betting it will get bought out by Federated Department Stores (FD ). But those in the know say talks between the two companies have been scrapped because of disagreement over price. "No other suitor will rescue May at its current inflated price," says industry expert Gilbert Harrison, chairman of Financo, a mergers and acquisitions boutique specializing in retail and merchandising deals.
May owns 400 stores in 37 states, among them Lord & Taylor, Marshall Field's, and Filene's. Investors racing to catch the next deal "shouldn't be taken in by all the hype," says Harrison. The sharp rise in stocks of suspected targets have all but foiled many possible deals, he adds. Though his firm does not short stocks, he thinks May shares have become so overvalued that the stock is an ideal short. It's surged from 23 in mid-October to 32 -- not far off its 52-week high of 36. May's financial profile, he notes, shows zero growth, with flat sales and profits since 2002. The stock deserves a price 10% to 20% below its current price, he figures. It's unusual for Harrison to recommend shorting a stock, since his bread-and-butter business is putting companies together. But he thinks May will be a bad bet for some time.
Researcher Gimme Credit sees "more downside risk than upside potential" for May as fundamentals weaken. Standard & Poor's (MHP ) recently revised its outlook to negative from stable because of declining same-store sales. It cut its earnings estimate by 20 cents, to $2.15 a share, for the year ending Jan. 31, 2006, vs. 2005's $1.82. May and Federated declined comment.
Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.
By Gene G. Marcial