It's funny. I never thought about Seeking Alpha as a bear site (or a bull site for that matter). That was true until I wrote two articles about J.C. Penney (NYSE:JCP) as a long for at least a trade and was subject to a barrage from the uber bears on the name. Up until today, I was mostly focused on whether or not the Company could survive and then after surviving with a middling recovery, whether or not it could deliver a decent return to equity investors. The result of all the work was two conclusions: 1) Yes they have plenty of liquidity to make it through next year even if the burn $800mm that flat EBITDA would generate. 2) That if you get somewhere near half way back to the sales level from before Ron Johnson, that the stock can double. You can go read those articles for the assumptions. This article is last (as I don't have any plans to write on JCP anymore unless something dramatic changes) in what has become a three-part series. I wanted to know what the bulls were thinking. Overlooked on SA or anywhere else I have read is what did the bulls see when they bought from Ackman/VNO in the mid to low teens? What did Ackman see when he was buying in the 20s or higher? My fairly modest assumptions produced close to a $20 stock, but it was hard to really get much more in value.
I know there has been a fair amount of dilution, but bulls who were buying in the $20s-30s and even the mid teens had to be expecting at least a double. So I decided to look at scenarios where Ron Johnson's cuts in SGA stuck and sales and margins went back to their highs. I believe Ackman was hoping that RJ could takes sales and margins to new heights because I keep hearing a $200 target associated with him.
I actually spent some time looking at bullish scenarios, one where the entire RJ era is reversed but his SGA cuts (Goldman Sachs was using much lower SGA than I am - about $4.1billion - and they are bearish) stick. In this unlikely scenario (I would argue just as unlikely as some of the many bearish Ch. 11 is imminent scenarios that SA members advocate), the results are fascinating. If you get back to $17 billion of sales and a 39% gross margin, but SGA drops to $4.1 billion, JCP generates $2.5 billion of EBITDA. If you get back to the $19 billion of Revenue at the top, EBITDA is closer to $3.4 billion. At 6x, the stock would trade at $38 to $56 a share - giving no credit to the massive debt pay down which would be another $8 or so in value or more like $46 to $64. Free cash flow a share would be over $8. Some scenario like this one must be what the bulls were seeing - also on a much lower share count then the one I am using.
I am not saying they get there, but everyone on this site seems to be assuming under $12 billion in top line or lower forever and then lights out liquidation. I personally think that the most you can realistically hope for is a double from a return to mediocrity. But maybe after Ullman stabilizes the ship, you get a real merchant like Ken Hicks at Foot Locker (NYSE:FL) who ignites sales. Bullish analysts are only at $14-15 billion in sales. It is worth looking at what can go right here. The secondary bought the Company time to execute a plan. These stores are very underutilized so...you never know. The stock is very oversold, but finally seems to be basing. If the business stabilizes as Kyle Bass seems to think will happen, maybe a scenario like this one can play out over 3-4 years. The market will price it in sooner.
Disclosure: I am long JCP. 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.
Additional disclosure: Positions can and do change without warning or notice.