- JCP has made it through the crunch period and is clearly going to be solvent.
- Solvency alone is not enough to make an exciting equity story.
- Buy below the $9.65 offering price with certainty that the Company has turned the corner.
I want to take our members back to the days after the offering when J.C. Penney (NYSE:JCP) stock seemed to go down every day and bears were circling this and other sites with tales of vendors cutting credit and imminent bankruptcy. When I bought the stock during and after the offering, all I really hoped for is that the Company could stop the bleeding. It looked like the $800 million+ raised would at least cover the Company through 2014's anticipated cash burn. I then started looking at what JCP could do with a recovery of half the lost sales and most if not all of the lost margin and reduced SGA to reflect smaller national ambitions (approximately $4 billion). My base case valuation was and remains close to $20 a share, which is a nice return from here. As I said in my last article, there is massive operating and financial leverage that could create asymmetric up side to well north of $50 a share.
What I didn't expect was that the Company would start comping positive so quickly and that it would comp 6-7% in the first quarter all in the midst of a retail tailspin that has hit even the mighty Whole Foods (NASDAQ:WFM), Lululemon (NASDAQ:LULU) and Macy's (NYSE:M). JCP is clearly taking share from others and Ullman deserves all the credit for one of the fastest operational turns that I have ever seen.
But JCP the stock, as opposed to the business, remains stuck below the $9.65 offering price. Now, it is possible that the offering, done in the midst of a rumor inspired liquidity crunch, was just too high as the bears would argue. I couldn't disagree with that sentiment more as the offering was done in the midst of a sales tailspin that wasn't obvious could be reversed. The burn for this year seemed headed to almost $1 billion. Now, sales and traffic are positive, margins are up nicely and SG and A is tamed and the Company is guiding to break even cash flow which no one was expecting at the time of the offering. Investors have much better insight into the Company's prospects than when the offering was done. It is as if you were given tomorrow's news today. The bond market clearly views the results this way as the bonds remain bid on the highs post earnings while the stock languishes. To be fair, the same thing happened after Q4 earnings and the stock staged a nice recovery, which is what I expect to see in the coming weeks and months. The rapid return to operating profitability and the prospect for massive free cash flow in short order is what makes for an exciting equity story, one that was and is better than what investors bought into a few short months ago during dire times at higher prices.
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.