Bears have spilled a lot of virtual ink telling the world how little value there is in J.C. Penney (JCP) and that even if the Company recovers, the multiple is still sky high. I have disputed this in many of my articles but the discussion of NOLs got me thinking about where we are creating JCP as a multiple of EBITDA down here. How cheap is it? The answer, extraordinarily cheap.
There has been a lot of noise around the Company lately. Today for example, the NY Post ran a story about how the Company was raising prices so it could mark down bigger percentages for Valentines Day. This action is what retailers do and what JCP did before Ron Johnson, it is not news. What would be news would be the naming of Sadove or some other retailing genius as CEO, which could and should happen on the next earnings call, or the lopping off of more underperforming stores and unnecessary SGA expense. The preserving of the NOL is news as it swings the Enterprise Value down materially and makes the multiple you are creating the Company absurdly low on an absolute and relative level.
First, my assumptions. This is where I think JCP will be in about 2 years in a recovery that brings between $1.5-$2.0 billion of EBITDA. Net debt will remain at about $3.5 billion and the share count at 304 million. I also assume that the NOLs will be used which will generate about $600 million in value. My enterprise value in these scenarios is just under $5 billion. At $1.5 billion of EBITDA, you are creating JCP for 3.2x. At $2 billion, the multiple drops to 2.4x. Even at a modest $1 billion in EBITDA (a poor recovery), the multiple is only 4.8x. By contrast, the comps are clustered at 5-8x EBITDA. Obviously, JCP needs to execute, but down here the stock is a very cheap option on a recovery. I expect the multiple to expand greatly when the numbers turn. Bears will argue that they can never get there, but I have written countless articles that these numbers represent only a middling recovery in sales from pre Ron Johnson and industry average gross margins.
Real value investors should take a look down here. These are dirt cheap multiples. The Company has over $2 billion of liquidity so there is a lot of time to let this turnaround play out. In an expensive market, this stock is very inexpensive.
Additional disclosure: positions can and do change without warning or notice.