How High Can J.C. Penney Rise?

| About: J.C. Penney (JCP)
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Summary

J.C. Penney operations have pulled out of their dive.

The company has been stabilized under Mike Ullman and should turn profitable soon.

Incoming CEO Marvin Ellison is the nuts-and-bolts guy the company needs.

If JCP can make even a small profit at $10 billion in sales the stock is worth $5 billion, twice its current price.

Back in March of 2013, I wrote what remains the most popular story I've done at Seeking Alpha - How Low Can J.C. Penney Go?

At the time, I recommended selling J.C. Penney (NYSE:JCP) stock, which was trading at around $15.50/share. The shares opened for trading today at a little over $8.

What has happened in the meantime has been nothing short of miraculous. Most companies in Penney's old position would have died. That it survives at all is a tribute to Myron "Mike" Ullman, who returned to his old position as CEO after the company fired Ron Johnson. Ullman has stabilized the top line - sales for the quarter ending in November were just about the same as a year earlier. He has stabilized the balance sheet - most of its debt is now long term instead of short-term financing, buying time. Operating cash flow, meanwhile, has stabilized at near zero, give or take.

This is triage. The company now looks a lot like it did before Johnson's arrival. It is not a great performer, but it should do pretty well this Christmas season, along with other retailers that benefit from lower oil prices.

Ullman has also chosen a new successor (Johnson came from the investment bankers). It's Marvin Ellison, a Home Depot (NYSE:HD) veteran who has also done time at Target (NYSE:TGT). Ellison is the opposite of Ron Johnson. He's a nuts-and-bolts logistics and operations guy, focused on what's going on behind the store floor rather than on it. He has no fashion experience, but JCP doesn't really sell fashion - it sells basics.

Ellison seems interested in getting pizzazz through alliances with brands such as Sephora and Walt Disney (NYSE:DIS), using its real estate as a mall anchor to its best advantage. He's not going to grow the company quickly, but he could make it modestly profitable, starting as early as the current quarter.

If he can do that, the stock could double quickly. Most retailers are worth about half their annual sales. Penney's stock is currently priced at less than one-fourth its sales, as its past reputation and troubled balance sheet, marked by continuing rumors that suppliers aren't going to make deliveries, continue to make it a loser in the eyes of investors.

But that's not Penney's reality. The reality is that this is a company with over $10 billion in sales (actual revenue for its last fiscal year was nearly $12 billion - I'm being very pessimistic) that should be worth $5 billion if it can simply be stabilized. And it is in the process of being stabilized. The company's performance over the weekend earned a "B+" grade from analyst Brian Sozzi, who had been one of its sharpest critics.

My guess is that, sometime after February, the end of its current fiscal quarter, you're going to see a change in sentiment on this stock. When it reports earnings and shows even a small profit, it will be off to the races. JCP could be double where it currently is by April. Let me repeat - that's my guess. You're taking a risk in following up on that, but without risk there is seldom reward.

Disclosure: The author is long DIS.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.