J.C. Penney: Back By Popular Demand

| About: J.C. Penney (JCP)


JCP stabilized in Q3.

JCP started to grow again in Q4.

JCP will show the trajectory of its turnaround in the coming quarters, which will return EBITDA to the $1-$2 billion range and get the stock north of $20.

Game, set and match for the bulls.

As I have said in other articles and comments about JCP, the battle has been won by the bulls, now there is just a mop-up operation.

The key to the bear case has always been liquidity. JCP just guided to not lowering its cash level and living within its existing lines of credit. Now, this could mean that it draws on its $400 mm accordion loan, but the important part of all this is that no equity is likely to be raised if it meets or exceeds its guidance. At this point, that is all anyone needs to know, that JCP can live within its existing covenants and get more debt without having to say please.

The debt markets are telling you that JCP has liquidity in the pricing, the term loan is at par, the bonds are on their post-equity raise highs, the yields have mostly dropped to the high single-digits from the mid-to-high teens. The 5-year CDS is below $20. The Company is now in a position, if it wanted, to take on unsecured debt at high but not onerous rates, at least for a short period of time while the EBITDA comes back to service the debt and create the equity value that the bulls see and the bears think is negligible. The story of the bears was primarily one of liquidity. And it was a good story, massive dilution, Chapter 11; these are the types of things most longs don't want to get near. With bankruptcy off the table for the foreseeable (multi-year) future. The bears have had to retreat to valuation - primarily that JCP will never generate enough revenue and EBITDA to be worth more than where it trades. I have shown in countless articles and comments why this logic is wrong. That the Company can generate $1.5-2 billion of EBITDA and that will get to a valuation well north of $20 over time. The premise is also absurd given that JCP was doing $19 billion of revenue and $2 billion of EBITDA only a few short years ago, and that its wounds were self-inflicted by a poor strategy by the previous CEO.

A few bulls have asked me why JCP seems stuck in the $8-$9 range after a massive move post-earnings. The quick answer is that it should, and probably will, be much higher over time. The stock has almost doubled off the lows, and was due to take some sort of rest, as stocks rarely (unless they're TSLA or CMG) go up in a straight line. The other answer is that the stock is also in valuation neverland, where the bulls dream of $20+ glory days, and the bears keep shorting, as they think it is a zero.

In terms of a turnaround, we are in the middle innings. The first innings was the stabilization that happened in Q3, next was the growth is sales in Q4, along with massive SGA leverage. The late innings will be making this year's guidance, and the game will be over when the Company generates $1-$2 billion in EBITDA.

Now, we have to wait and see if the Company makes, and ideally, exceeds guidance. Making guidance will give JCP both the liquidity and time to get to my EBITDA targets without further dilution and with minimal additional debt.

I wrote this piece at the request of another SA member, who was curious about why the stock has stalled. No one really knows for sure: it could be taking a pause before further upward moves, it could be held back by inter cap arbs who are buying a lot of debt higher and want to hedge, or the stock could be waiting for the next positive operational data point. I think that the bonds have moved to the point where the stock should at least be above the $9.60 offering price, and probably in the $10-$14 range, I would guess that we should see this soon as the market gains confidence in the turnaround and value players who weren't burned by the offering take a closer look now that the stock is "safe" to own. I don't think there actually needs to be much more ink spilled explaining the bull case, as it is obvious, and the relative silence on the SA boards, other than a few angry bears, tells you that people have moved on from the "crisis of JCP." The next story is about the comeback of JCP and how obvious it was in retrospect. Well, obvious to a few.

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.

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