JCP: What The Bonds Are Telling Us

Dec.18.13 | About: J.C. Penney (JCP)

I will admit that I am amazed that even while (NYSE:JCP) has stabilized the sales drop, worked off most if not all of the RJ inventory while not crushing margins, brought back beloved private brands, and raised equity to give them at least two years or more of breathing room, the stock still languishes near the lows of the year and well below the recent buy by CEO Ullman, and the recent stock offering at $9.60.

I am sure that Bass selling and the SEC investigation (which is non-news given the events around the offering) knocked the stock down to this level on their own. What is befuddling is that the stock has stayed down here hugging its 50 day moving average for dear life.

What's fascinating is despite an over 20% drop in the stock, the bond prices have barely budged, and they are trading on their recent highs. The bank debt is trading around $98 which isn't even a distressed level. The 5 year CDS is a off a small amount but is basically near its lows as well. In the weeks following the offering, the 5 year CDS was in the mid 30s and now is in the low 20s. Longer dated bonds were yielding 18% and are now in the 11-12% range, which isn't all that distressed.

In short, the (usually smart money) bond market is saying all well while the (less smart) equity markets are lagging behind. So who is right? Well, the bond market of course. Look at all that has been accomplished and more from what I outlined in the first paragraph. I didn't even mention the SKS CEO in the Chairman's role. I suspect that everyone is waiting with bated breath for holiday results but I have news for all of you, they are going to be fine but the results most likely won't move the needle one way or the other. The big events have happened: RJ fired, Ullman hired, debt raised, equity raised, comps. turn upward, and SGA cut (with more coming). In short, JCP will make it through this Christmas and probably at least the next two. The next events are going to play out over several quarters ala BBY - comp. sales increases, GM back to mid 30s, and more SGA cuts. It won't be one magic bullet, but just relentless execution. The only real event will be the naming of a permanent CEO. After all the excitement of the past few years, boring old JCP would be good and profitable for equity.

In summary, the bonds know. The stock should turn back upward in the not too distant future.

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.