J.C. Penney: An Argument Against The Bulls

Sep.19.13 | About: J.C. Penney (JCP)

If you track the markets, or even if you don't, you've probably read something recently about J.C. Penney (NYSE:JCP). The news itself has been, to put it mildly, baffling. Is JCP a value stock at these levels? George Soros is buying it, so you should too! Well, even though Soros is buying, other major shareholders are jumping ship. A lot of contradictory info - the only person making money out of confusing news of this nature is your broker. I'll briefly give my opinion in, what I hope to be, a more balanced approach.

Firstly, what has the Company done in recent quarters? Net sales are down by 12% in the most recent quarter as compared to the same quarter of last year, while gross margin is down by nearly 30%. There has been a negative operating margin for some time, resulting in a trend of negative EPS for 8 of the last 10 quarters.

Comparing the company fundamentals (table below) to those of the main competitors does not lend much support to the "Soros is buying, so you should too" cause:

Click to enlarge

Trends all point in the same direction:

  • Sales for the most recent quarter [MRQ] vs. same quarter last year: -11.88%.
  • Sales twelve trailing months [TTM] vs. TTM 1 year ago: -22.3%.
  • Sales 5-yr growth rate: -8.15%
  • EPS MRQ vs. same quarter last year: -296%
  • EPS TTM vs. TTM 1 year ago: -193%

All dire results, but we knew historic data wouldn't look great; what about forecasts? Mean consensus analyst estimates of EPS on Reuters (JCP) stands at:

  • Year ending Jan 2013: -1.44%
  • Year ending Jan 2014: -5.96%
  • Year ending Jan 2015: -2.78%
  • Long-term growth rate: -1.90%.

Much of this data is already priced in, so the question is: how are things going to get better?

The retail market is ruthless and JCP does not have a real competitive advantage over its peers. The one exception is the brand, but new management has not outlined, what I would consider to be, a tangible strategic directions that will significantly change the outlook.

One major saving grace for JCP is the book value per share of $10.53, which, at a current share price of $13.74, is only a few dollars shy of being at par. However, the real world issue with shearing assets is that the value of similar assets decreases rapidly. In addition, the Company's long term debt on the balance sheet is close to $5 billion.

And finally my last and favorite bull's argument on JCP (well, two if you want to be exact): it's a cheap stock and big sharks are buying. First, there is a very good reason why it is cheap. A look at fundamentals and outlook (above) should dispel any notion that it is "cheap". The next argument, that Soros is buying JCP, can be somewhat misleading. Soros has bought around $51 million worth of JCP; from his $20 billion in funds under management, that equates to a 0.25% portfolio position. I'm not willing to put my hard earned money into a stock play based on that.

In summary, the rickety structure of JCP will inevitably bring another bad quarterly result, and investors that were looking for a quick share price swing will likely flee. If you really want to take a position in this stock, buy yourself a put option.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.