Street Prefers Kohl's, Bearish On Best Buy and J.C. Penney

 |  Includes: BBY, JCP, KSS
by: Takeover Analyst

With the recent announcement of employment figures, investors are naturally looking for stocks that might benefit from a potential rise in consumer expenditure. As far as retail is concerned, the Street is largely bearish, rating Best Buy (NYSE:BBY) and JCPenney (NYSE:JCP) "holds". Kohl's (NYSE:KSS), which has had a weak recent performance, is ironically rated a "buy".

From a multiples perspective, Best Buy is the cheapest of the three. It trades at a respective 8.9x and 6.9x past and forward earnings, while offering the highest dividend yield at 2.5%. JCPenney and Kohl's trade at 20x and 10.1x forward earnings. Kohl's is the safest of these retailers, with 20% less volatility than the broader market, and a free cash flow yield at 7.7%.

Much of the reason why the Street is reserved about Best Buy, despite its attractive multiples and high dividend yield, relates to poor same-store sales, decreases to scale, and domestic stagnation. At the third-quarter earnings call, Best Buy's CEO, Brian Dunn, however, noted some progress, despite an EPS miss:

"In terms of our Domestic sales performance, our Domestic comp was up 1% for the quarter and was strengthened by November's performance. Our in-store comps on Black Friday were strong, helping us to deliver overall comp of 7% for the day. We're pleased that traffic and comp sales were up across all channels for the quarter, including at the store level and very strong growth in our dot com channel.

As I mentioned earlier, we took a number of actions to drive our business, including running effective promotions across multiple channels, significantly expanding our online assortment and ensuring we are competitively priced. During Black Friday, we delivered a number of records in our Domestic business; the number of people in line outside the stores, as well as overall traffic, sales and transactions. According to third-party customer surveys, Best Buy was the #1 place to shop in CE and technology and for all of retail, Best Buy ranked #2 in initial shopping destination. In addition, was the third most visited U.S. retail website on Black Friday, up from fourth last year".

Comps may have only grown by 0.3% domestically, but mobile is growing at a double-digit rate. Furthermore, management is taking appropriate steps for long-term value creation by closing down underperforming stores. Consensus estimates for Best Buy's EPS forecast that it will decline by 1.5% to $3.38 in 2012, and then grow by 9.2% and 7.6% in the following two years. Assuming a multiple of 8.5x and a conservative 2013 EPS of $3.65, the rough intrinsic value of the stock is $31.03, implying 22.2% upside.

In JCPenney, we find a company that has just started to undergo significant brand/marketing overhauls. The firm is employing a new pricing strategy, called 'Fair and Square' that will offer monthly promotions and everyday low prices. Further, it will be restructuring store layouts, while cutting prices by as much as 40%.

Consensus estimates for JCPenney's EPS forecast that it will decline by 23.9% to $1.21 in 2012 and then grow by 75.2% and 35.8% in the following two years. Assuming a multiple of 22.5x and a conservative 2013 EPS of $2.08, the rough intrinsic value of the stock is $46.80, implying 8.8% upside.

Sales momentum has similarly been weak at Kohl's with same-store sales down 0.1% in the recent quarter, or 250 bps below consensus. Consensus estimates for Kohl's EPS forecast that it will grow by 17.8% to $4.30 in 2012, and then by 15.6% and 14.7% in the following two years. Assuming a multiple of 12.5x and a conservative 2013 EPS of $4.91, the rough intrinsic value of the stock is $41.38, implying 22.4% upside.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.