Look at the former high-flying stocks like Tesla (NASDAQ:TSLA) and Chipotle (NYSE:CMG); they are crashing a la internet stocks in March of 2000. After a huge run, the market has gone into full panic mode. In the case of J.C. Penney (NYSE:JCP), the baby has been thrown out with the bathwater.
I find it useful to keep a checklist of what the company has done since the dark days when it was forced to do a massively dilutive emergency raise to keep the vendors calm before Christmas:
- Shored up the balance sheet with over $800 million of fresh equity.
- Made quarterly guidance for two quarters in a row for the first time in recent memory.
- Achieved positive comp store sales for the first time in years.
- Cut SG&A to below $4 billion and Capex to $250 million so that the company can lower its cash breakeven, which buys time for the company to achieve its turnaround.
- Brought back core brands and eliminated non-core flights of Ron Johnson's fancy that didn't sell.
- Guided to maintaining liquidity in the coming year with no need for additional equity dilution.
When I first bought and wrote about the stock during and after the $9.65 per share equity raise, none of the above looked likely. As a long, I hoped that JCP could comp positively but with the debt and equity in free fall, the market clearly disagreed.
The past Christmas is littered with the dead bodies of retailers: Sears Holdings (NASDAQ:SHLD) comped down almost 10% in what looks like a slow motion liquidation, and the once mighty Lululemon (NASDAQ:LULU) comped negatively. Macy's (NYSE:M) was considered the winner with low single digit comps. The Bon-Ton Stores (NASDAQ:BONT) had such a bad Christmas that the very talented CEO threw up his hands and quit. But by focusing on going back to basics and their core middle class customer, JCP managed to stabilize a once sinking ship and set the stage for growth without further dilution. They did this in the face of one of the worst retail holiday periods in recent memory where many malls were literally snowed in.
What does this mean for equity? The chance to earn $1.5-2.0 billion in EBITDA. At 6x EBITDA, the stock should trade between the mid to high teens and the mid to high 20s. The shorts should not be able to cover here. The stock should at least be above the $9.65 offer price as you are buying here with much better information about the company's prospects than when they did the offering. The difference is that the market has turned ugly and retail is downright awful. Still the retail darlings like Gap Inc. (NYSE:GPS) and LULU are down but not cheap. If JCP continues to execute, my target prices should prove conservative. Christmas is coming early this year for the buyers of the stock, take the gift.
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 at any time without warning or notice.