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Company Profile

"Over 110 years ago, James Cash Penney founded his company on the principle of treating customers the way he wanted to be treated himself: fair and square. Today, rooted in its rich heritage, J. C. Penney Company, Inc. (NYSE: JCP) is re-imagining every aspect of its business in order to reclaim its birthright and become America's favorite store. The Company is transforming the way it does business and remaking the customer experience across its 1,100 jcpenney stores and on jcp.com. On every visit, customers will discover straightforward Fair and Square Pricing, month-long promotions that are in sync with the rhythm of their lives, exceptionally curated merchandise, artful presentation, and unmatched customer service." - J.C. Penney Corporate Website

J.C. Penney is scheduled to release 2012 Q1 earnings on Tuesday, May 15, at 4:00pm.

Current Analyst Estimates

The consensus analyst estimate for the company's Q1 2012 earnings are for earnings of $-0.10/share on revenue of $3.48 billion. The earnings estimates from the 14 analysts covering the stock range between $-0.51/share and $0.05/share while the revenue estimates range between $3.29 billion and $3.85 billion. The Q1 2012 earnings estimate represents a significant decline from the company's earnings of $0.30 a year ago. Relative to the previous year's report, Q1 revenue looks to be down 11.7%.

Analyst Consensus Estimate Trend

Consensus analyst estimates have been decreasing throughout the quarter with 4 analysts lowering their estimates within the last 30 days. At the start of the quarter estimates were for the company to earn $0.25/share. That decreased significantly to $0.02/share in March, and then steadily drifted lower from there. Revisions in estimates are likely to be attributed to disappointing guidance by competitors as well as same-store sales numbers not meeting expectations.

Current Analyst Price Targets

Since the beginning of the 2012 year only two firms have revised or initiated recommendations for J.C. Penney. In January Argus reiterated its buy recommendation and raised its price target to $49/share from $38. In April, UBS came in and initiated a neutral recommendation on the retailer while placing its price target at $36 per share.

Ratio Analysis

To get a sense of the current valuation with respect to its competitors, below is the ratio analysis for J.C. Penney versus Nordstrom (NYSE:JWN), Macy's (NYSE:M) and Sak's Incorporated (NYSE:SKS) along with the industry and S&P 500 (NYSEARCA:SPY) averages.

JCPJWNMSKSIndustryS&P 500
Price / Earnings---17.5313.824.88153.815.3
PEG---1.511.321.6------
Price / Sales0.431.060.640.560.51.3
Price / Book1.825.862.811.422.22.2
Dividend Yield2.37%1.96%1.99%---1.5%2.1%

Other competitors in the apparel retailer / department store industry include Kohl's (NYSE:KSS) and Dillard's (NYSE:DDS).

Fair Value Analysis

The valuation of discounted cash flows is an effective tool in identifying the intrinsic value for well established companies. The input for the analysis is as follows:

Input
Revenue Growth Rate (Current Year / Ongoing)-5.0% / 3.0%
Cost of Goods Sold (COGS)(% of Revenue)61.4%
Operating Expenses (% of Revenue)34%
Tax Rate29.5%
Weighted Average Cost of Capital9%

J.C. Penney has taken major steps to redefine itself and as a result has incurred significant costs. The benefits of such restructuring have yet to come to fruition but many believe they are on their way. As a result the fair value analysis will maintain the analysts estimated growth rate for 2012 at -5% and for 2013 use flat revenue growth. Ongoing from 2013 an average growth of 3% annually has been used, of course this is pending on the success of the restructuring.

The cost of goods sold (COGS) has been rather variable over the past five years and so for the sake of a conservative measure the five-year average has been used. Operating expenses for the company have been between 34% and 36% of revenue for the last three years, however as the company begins to find its self after the revamping of its stores and advertising methods those expenses should narrow. For the time being, 34% will be used. However that number could and should decrease moving forward.

Finally, the five-year median tax rate plus 500 basis points has been used since this input can be highly variable. The inputs described above result in an approximate fair valuation of $28.87/share. This fair value approximation implies the stock to be overvalued with the current stock price representing a 14.6% premium to the estimated fair value. It is important to note that because of the recent turnaround the company has embarked on, the inputs for the analysis can be highly variable, thus resulting in an inaccurate fair value approximation.

Data and Information obtained from TD Ameritrade and Finviz.

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

Source: Earnings Preview: J.C. Penney

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