J.C. Penney: Saying Sayonara To The Bankruptcy Discount

| About: J.C. Penney (JCP)

Summary

A full turnaround remains a longshot - the smart money bought the equity purely to exploit the collapse of the bankruptcy discount.

With the subsequent appreciation, that mispricing - along with the margin of safety - is now history.

What next?

Even a lousy business can be a good investment at the right price.

In that regard, although they are very different businesses, J.C. Penney (NYSE:JCP) at $6 reminded us very much of DELL at $9 (see "Our Descent Into Dell" at www.greyvm.com). In the latter case, the MBO conveniently preempted any debate over exit price. Not so with JCP (at least not yet - and we're not holding our breath re a buyout).

Whether JCP would evade bankruptcy was always a much simpler analysis than calculating its value as a going concern. To be a buyer of the equity at $6 all one needed to believe was that, utilizing strategies that had always worked before, JCP could entice at least enough shoppers to avoid Chapter 11 proceedings (see our prior piece on SA, "Penney For Your Plotz," for a fuller discussion of our original rationale).

With the Company's performance having improved enough that it's no longer teetering on the brink, the easy money that came with playing the bankruptcy discount is largely history, along with the margin of safety embedded in a $6 share price. Now investors must confront the much more complex issue of JCP's worth as a going concern.

Because we never viewed JCP as a long-term investment, the Company's going-concern value is only relevant as it pertains to calibrating our exit. At approximately what price do the shares start to look overvalued relative to the Company's most plausible future?

With the business still very much a turnaround, even an approximation is difficult. But unless management shocks us with their progress, in our opinion the risk/reward becomes much less attractive once the shares have breached the mid-teens.

This may seem like a suspiciously vague answer to the question of value. But in a situation as dynamic as JCP's, guidance any more specific would be even less credible.

Disclosure: The author is long JCP. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.