Buy J.C. Penney Before Earnings, Coca-Cola's China Conundrum, And Our Weekly Outlook

Includes: DIA, JCP, KO, SPY
by: David Ristau

In this week's weekly outlook, we will be diving into earnings from J.C. Penney (NYSE:JCP) and whether or not they are forcing a buy or sell. We will take a deeper look at Coca-Cola (NYSE:KO) and give our updated look at them as we move them from Buy to Sell. Further, we will do our weekly outlook look at charts, economic data, earnings, and much more. Make sure to take a look at why we are liking J.C. Penney and think now is no longer the time to buy KO.


The market got a nice boost on Thursday as Fed Chair hopeful Janet Yellen backed QE and showed no signs of wanting to pull back on the plan. With the Fed still behind the market, equities continue to see more upside. Yellen did note the plan cannot go on forever, but she looks to still like it for now. For this week, the market has a tinge to move higher, and it will be paying attention mostly to economic data, developments overseas, and retail information on the data and earnings side. Overall, we look for a quiet week without any make/break moments like we had last week. Some indices, though, are at breakout points.

Chart Overview

The S&P 500 (NYSEARCA:SPY) is breaking out of all resistance lines and looks solid right now over 1800. Solid support at the 1750 and 1775 area. Look for a solid move higher from here.

The Dow Jones (NYSEARCA:DIA) is also looking to breakout and should test the 16000 level then could move higher. DIA has started to be very solid, but its first major support line is at around 15500, so if we do correct it could be a big reversal for DIA.

Economic Data


Data Report

Market Expectations

Previous Report

November 18

NAHB Housing Market Index - November



November 19

Employment Cost Index - Q3



November 20

Retail Sales - October



November 20

CPI - October



November 20

Existing Home Sales - October



November 20

Business Inventories - Sep



November 20

FOMC Minutes - 10/30



November 21

Initial Claims - 11/16



November 21

PPI - October



November 21

Philly Fed - November



November 22

JOLTS - Job Openings - September



As one can see, it is not a terribly busy week for the market as far as economic data. We do have, though, some key reports to watch. We start out Monday with NAHB Housing Market Index, which should give us a good reading of how the housing market is doing with recent issues like the government shutdown. Retail sales on Wednesday along with FOMC Minutes should be highlights. Retails sales are for October, so we can get more information on how the government shutdown affected retailers. The FOMC Minutes on Wednesday will be parsed for taper talk. Finally, we finish the week with two employment signals from initial claims and JOLTS. Further, we get key price index data with PPI and CPI that will affect inflation conversation for the Fed, so that is something to watch.

Foreign Markets

Outside of the USA, Europe and Asia will likely fill the gap of lack of information for the market to react to this week. Overseas, we will get the Euro-Zone ZEW Survey for economic sentiment on Tuesday. That index is supposed to show a nice rise month over month and will be a good signal of how the Europe recovery is going. On Wednesday, we get the Japanese Industry Activity Index followed by the BOJ Policy Statement and Rate Decision on Thursday. We will also get the HSBC Flash PMI on Thursday as well as PMIs from France, Germany, and the Euro-Zone. All PMIs are expected to rise year/year. Finally, we finish the week with Germany GDP along with a large amount of data on export, imports, investments, government spending, and the key IFO Business Climate survey. It is a huge week overseas, and that should take a lot of the market's attention.



Key Company

November 18 (NYSE:CRM)

November 19

Home Depot (NYSE:HD)

November 19

Medtronic (NYSE:MDT)

November 19

TJX Companies (NYSE:TJX)

November 19

Best Buy (NYSE:BBY)

November 20

Lowe's (NYSE:LOW)

November 20

Deere (NYSE:DE)

November 20

J.C. Penney

November 21

Target (NYSE:TGT)

November 21


Earnings are less flashy this week with the start of the retail earnings season as Target, Gap, J.C. Penney, Best Buy, Home Depot, and Lowe's highlight the week. Overall, these earnings won't move the market, but the industry will move on them especially with what they say about the November - January holiday season. The earnings report we are keying in on the most is JCP.

In our last report on JCP on 09/27, we recommended buying JCP, as we believed the stock was bottoming. Since then, the stock is about neutral, and we want to update our opinion heading into the company's key earnings report on Wednesday before the market opens. Expectations are for JCP to see a 4%+ revenue drop and EPS drop from -0.93 to -1.72. The company's earnings are not as crucial as the company seeing some green shoots surrounding their recovery with sales. The company needs to prove to investors that it is starting to see good trends for sales and can keep those trends going. In our last report, we highlighted that we liked JCP for the following reasons:

· Digital approach to improve efficiency and margins

· Back-to-school strength in shopping

· The worst is priced into the stock already

Since that report, we have seen more positives for the company. Several big firms are entering JCP first off, which we believe signals that a lot of hedge funds believe the worst is over. George Soros, Appaloosa, and JANA Partners (three of the most powerful funds in the marketplace) all announced new stakes or increased stakes in JCP in their latest reported stakes. Further, we have seen some solid information come in on channel checks. When we last wrote our report, a lot of channel checks were negative, but the company was saying it was #2 in back-to-school shopping…something did not line up. Last week, Gilford Securities noted that following channel checks, sales could rise 10-15% in this report. Expectations are for them to drop -4%.

Further, the company seems to be showing more signs of a turnaround in their latest sales update. In October, same-store sales were up 1%. It is not a ton or anything to get overly excited about, but with how cheap the stock is, these SSS are exciting. In that report, the company noted:

J.C. Penney has made significant progress in addressing the challenges it faces, and we believe the Company is on the right track to return to long-term profitable growth. We are proud of our October sales improvement, which we achieved despite the federal government shutdown and a challenging consumer environment. Not only did we deliver positive same store sales for the first time since December of 2011, we also saw significantly improved sales trends in Home and Men's apparel, as well as Women's accessories.

Further, the digital revolution we had mentioned is working. The company saw a 38% pop in sales. We believe expectations are much too low going into the company's Q4 report, and we believe it could be time for a potential pop. The key will be the company's guidance heading into 2014FY and the holiday season. Additionally, the company was able to raise more capital through another public offering that we believe should quell some cash concerns. With the stock trading for 0.15x sales and 1.3x cash, this is an extremely cheap stock that has lots of upside.

Fed Outlook

The Fed has become very crucial to the market's movement over the past couple months. Each speech can move the market, and each report is important. This week, we have speeches on Monday, Tuesday, Wednesday, Thursday, and Friday. Watch out for these speeches everyday. Additionally, we get FOMC Minutes on Wednesday. While Yellen noted that she is seeing no reasons to taper and wants to keep things going on QE, the report will still be parsed for taper conversation. Yet, it should have a more limited impact since the Yellen report would override any concerns.


We are positive on the week, as we believe that it can have a solid move higher with the Fed concerns limited now and a limited scope of developments. We have some important data to watch, but the more important results will be from overseas it seems as we have a busy week in Europe and Asia. Additionally, we are intrigued by the start of retail earnings season that should give some interesting perspective there.

Deeper Look

Ticker: Coca-Cola

We have pulled back on our interest in Coca-Cola and downgraded our opinion from Buy to Hold as the company has rebounded since early October by about 10%. We have updated our price target and actually dropped our price target from $59 to $52 in our latest model. The reasons that we decided to drop our target slightly was due to high capital expenditures in China over the next several years that will cost the company quite a bit and should keep margins pressured as the company chases growth into Asia as well as we believe that the company will continue to see continued drops in demand in North America.

Industry Trends

The soft drink industry continues to see consolidation and lack of demand. The problem is that the North American appetite for soda has diminished as demand has gone into other places like coffee, juices, and more healthy options. Soda has seen a drop in sales volumes for eight straight years. As a result Coca-Cola has made some moves to supplement demand like strong international expansion and move into non- soft drink beverages like bottled water, teas, energy drinks, and sports drinks. The industry should continue this way, as volumes in soda are not expected to reverse soon.

Major Catalyst

Right now, the most important catalyst for KO is China. In the company's latest quarterly earnings report, KO announced 9% growth in volumes in China year/year, and this market is clearly a place of growth for the company. The company has been working to battle back in China after they had struggled to start the year. After Q2, the company noted this about the Chinese market:

China's economy has been slowed, as this is now being soft consumer spending. China's first half retail sales was the slowest in 10 years while much of the growth in the non-alcoholic ready to drink beverage industry in the second quarter came from the value oriented water category. As a result, our volume performance in China remains softened with even for the quarter cycling 7% growth from prior year. We command a leadership position in China in those (inaudible) and market share in sparkling as well as in juices and juice drink.

The company, therefore, decided to bring in a new strategy there by adding new faces to management, working on consumer communication, and adding investments. The company saw a bounce back in the latest quarter already with 9% volume growth, exceeding expectations. The company looks like they will continue to push the envelope here with $4B in investments in new plants between 2015-2017. That comes after the company already is in the midst of a major $4B investment in bottling and production facilities. The company has seen pressure from competition, and they want to push more of their product. One issue, though, is that the ceiling could be limited with China focused on teas and healthier drinks more so than North America or Europe.

The company, though, will likely have to do acquisitions to grow the pie there further to play on this trend rather than see a lot of organic growth. For example, the JDB brand, which makes canned herbal tea is a more popular drink that Coke in many parts of China. Competition is strong, and we foresee more than just the $4B in investments in plants coming into China if this is going to be the hallmark of Coke's growth moving forward. In the past year, the company made capital expenditures of $2.4B. With the developments in China, we could be seeing capital expenditures around $3B for the next several years. If we do not see capex at those levels, we believe that growth will not be as strong as investors want to see.

For that reason, the equity value of the company, currently, looks limited. We will break this down more in our pricing and valuation section. While China is the future for KO, it also will have potential snags moving forward. Investments will definitely help the company grow, but we should expect operating margins to be pressured some in the coming years with high capex. Further, without a tea threat, the company may see that volume growth not be quite as much as some foresee.

The biggest question for Coke and China may actually be the per capita expansion. Right now, beverages per capita in China are far below the USA and other wealthier nations. As consumer income rises, Coke should see more volume. Yet, we believe the company could lag unless they acquire local brands that make healthier drinks.


In our pricing model, we have assumed a pretty solid growth level for the company moving forward of 6-7% in revenue per year, as we do believe in the upside in China. We foresee operating income growing to just south of $13B by 2017 - near 25% growth over the next four years. The company should see operating income lag revenue growth, which we foresee growing at a faster rate due to operating margins being held in check as competition rises in China and the company spends a lot of money. Capital expenditures should continue to rise to over $3B. We still do see around 25% upside over the next twelve months, but we like the stock under $40 for a purchase.

Step 1.

Project operating income, taxes, depreciation, capex, and working capital for five years. Calculate cash flow available by taking operating income - taxes + depreciation - capital expenditures - working capital.

2013 Projections

2014 Projections

2015 Projections

2016 Projections

2017 Projections

Operating Income


















Capital Expendit.






Working Capital






Available Cash Flow






Step 2.

Calculate present value of available cash flow (PV factor of WACC * available cash flow). The PV factor of WACC is calculated by taking 1 / [(1 + WACC)^# of FY years away from current]. For example, 2016 would be 1 / [(1 + WACC)^4 (2016-2012). WACC for KO: 6.0%






PV Factor of WACC






PV of Available Cash Flow






Step 3.

For the fifth year, we calculate a residual calculation. Taking the fifth year available cash flow and dividing by the cap rate, which is calculated by WACC subtracting out residual growth rate, calculate this number. Cap Rate for KO: 3.0%


Available Cash Flow


Divided by Cap Rate


Residual Value


Multiply by 20167PV Factor


PV of Residual Value


Step 4.

Calculate Equity Value - add PV of residual value, available cash flow PVs, current cash, and subtract debt:

Sum of Available Cash Flows


PV of Residual Value


Cash/Cash Equivalents


Interest Bearing Debt


Equity Value


Step 5.

Divide equity value by shares outstanding:

Equity Value


Shares Outstanding


Price Target


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

Business relationship disclosure: I have no business relationship with any company whose stock is mentioned in this article. The Oxen Group is a team of analysts. This article was written by David Ristau, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.