As a value investor, I get interested in almost any security that has been cut in half year to date and is trading at multi-year lows - especially one with a storied though tarnished brand like J.C. Penney (NYSE:JCP). So I was trying to understand the bull case a bit better with a friend who had also looked at JCP. The bear case, we can read in the paper and SA every day.
I view JCP as an oversold stock and therefore as a potential trade as news and sentiment could not be worse. I believe that most if not all of the 4 large holders post Ackman (Bass, Soros, and Glenview) have all probably bailed with Perry over the massively dilutive offering, judging by the volume alone (the entire float and then some has turned over). By the numbers, this is a much harder bull case than Best Buy (NYSE:BBY) was this time last year as things have really gone off the rails vs. BBY where there were some signs of stability and no real liquidity issues (exactly the opposite - an LBO bid by the founder). To own this stock, you have to believe that the staggering decline from $17 billion in sales in just two years ago to $12 billion estimated this year can be mitigated (the Ron Johnson effect). By going back to couponing and low-end private label brands that its old customers liked, it is conceivable that JCP could get back to $15 billion of top line - a little better than half way back. It also seems possible that JCP could get back to a 11% EBITDA multiple on that sales base or $1.65 billion. 6x that number is $9.9 billion. I am going to assume it burns through all the money just raised until break even hits and use the Bloomberg net debt number of $4.3 billion, which gets you $5.6 billion of equity. Divide that number by 304 million proforma shares and you are at $18.42.
Now a lot has to go right for all this to happen and a lot could go wrong. But this equity raise will give the longs at least a year to see if Mike Ullman or whoever the company brings in can turn this ship. I think the math that I just outlined is part of what the bulls see but they are a long way from achieving it. I do think that to take the risk of owning the common here, you have to believe this is directionally true as you need a double to be compensated for the risk. The above analysis shows how you can double your money over time. In the short term, JCP has enough to make it through Q4 and probably next year which should be good for a buck or two once the stock issue overhang clears.
Additional disclosure: Long JCP stock and options though positions can and do change at any time without notice or warning.