If you did not own J.C. Penney's stock prior to last week, it may feel like you missed the boat. In hindsight, it feels so obvious that Ron Johnson and his team of Apple (AAPL) alums would announce a compelling strategy that would move the stock. But-- if you are like me, and missed it-- there is still a way to participate by selling put options.
JCP's stock increased 18% last week as the company hosted a 2 day analyst event on January 25 and 26. The big day for the stock was on the second day of the analyst event. On day 2 Chief Operating Officer Michael Kramer provided revised financial guidance, which was considerably above the then consensus estimates of $1.25 per share. The guidance was presented as follows:
"Now let's talk about guidance. Historically, we've been providing guidance on a quarterly basis. Go forward, we are going to eliminate that and only provide guidance on an annual basis. Historically, we've provided - we've been reporting sales on a monthly basis. Go forward, we're going to report monthly - or quarterly sales, consistent with the majority of the industry. But what I will tell you is our guidance for 2012 is to meet or exceed 2010's EPS of $1.59, adjusted $2.16. Why is this important to us? Because we believe that we're going to be able to provide better shareholder return in a year of transformation than what we did in 2010. Now, clearly we we're a new management team, and we've got to build the credibility, but I can tell you from our past lives and those people that you know me from Abercrombie & Fitch, we're not going to commit to anything that we're not confident we can hit."
Given the robust transformation that is being undertaken, one would expect management to provide guidance that has a large margin of safety. The reaction of the market supports this idea. The $2.16 of adjusted EPS is a floor that management MUST believe they can beat.
JCP's stock is now at $41.42, which is 19.2x the guidance. For arguments sake, assume JCP beats its guidance by 25% and the $2.16 is actually $2.70 (a nice beat). This would still represent an earnings multiple of 15x. To put this into context, one of JCP's main competitors-- Macy's (M)-- has had a stellar turnaround of its own with its My Macy's, Omni-channel, and localization strategies, and has consistently beat estimates for the last few years. However, Macy's trades at only 10.4x forward earnings.
JCP is being given a premium multiple based on the belief that the new Apple-trained management team can turn the company around in dramatic fashion. And, based on the presentations this past week, I personally would not bet against them. While I'm not going to get into the nuances of their strategy in this posting, I would encourage anyone interested to listen to the webcast replays. It's hard not to get excited about JCP based on the presentations.
Stupidly, I did not buy JCP stock before the analyst presentations and at $41.42 it feels too expensive. However, there is still a way to participate in JCP's turnaround.
I am assuming that JCP exceeds its fiscal 2013 guidance. Further, given the growth potential of its turnaround, I am willing to ascribe a slight premium to Macy's multiple. Therefore I take $2.70 of earnings per share and a multiple of 12x and find that $32.40 feels like a fair value to pay for JCP today. At $41.42 JCP is trading at 27.8% above this level.
If I would be willing to buy JCP at $32 then I can sell put options generating a premium for myself, which allows me to participate in the upside of JCP. If market volatility causes the stock to fall to $32 I am a buyer anyway. I can sell August 2012 $32 puts for $1.50 per share, or I can line up the expiration of the put option with JCP's fiscal year and sell January 2013 $30 puts for $2.05 (or $35 puts for $3.65). While my gain is limited to the amount of premium I receive, if I truly believe in the story, this is a way to participate.
Disclosure: I am long JCP.
