Everyone Hates J.C. Penney, but I Like It

 | Dec 07, 2012 | 2:30 PM EST
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J.C. Penney's (JCP) stock has run off the road. It is down more than 57% from Feb. 9, this year's high, through Friday. You can hear the murmurs getting louder.

Will vendors stop supplying Penney or charge onerous terms to keep its deliveries coming? Will the company's layoffs -- thousands of in-store employees and hundreds at the home office -- result in slower service? If so, will that further crimp customer traffic, which is already disappointing?

Anyone who owns J.C. Penney stock must be asking those questions. I don't have simple yes-or-no answers, but on balance, I believe Penney will muddle through and achieve some operating improvements. I believe there is rebound potential in this deeply out-of-favor stock.

Penney shares started this year around $41 and are near $17 now. Short-sellers have bet against it; ordinary investors have sold it to take tax losses, and nervous traders have jumped overboard.

Penney had sales of about $14.5 billion in the past four quarters. Yet the market value of its stock is only $3.9 billion. That works out to a price-to-sales ratio of 0.27, which is the kind of multiple you see in companies that are crying out for a turnaround. Sears Holdings (SHLD), which is more notoriously troubled than Penney, has a 0.10 multiple. The ratio is 0.60 at Macy's (M) and 0.90 at Nordstrom (JWN).

Penney's book value (corporate net worth per share) is almost $16, so the stock is selling just a whisker above book. That smells like a bargain to me.

I'm not saying that Penney doesn't have problems. It has posted losses for three quarters in a row, and it is expected to show only a feeble profit in the Christmas quarter, which ends in January. Its merchandise isn't trendy, and its balance sheet is mediocre, with debt at 85% of revenue.

Faced with such difficulties, Wall Street analysts scorn the stock. Of 20 analysts who cover Penney, only four call it a Buy. There are 11 Holds and five Underperform or Sell ratings.

Some of the analysts liked the stock until its latest bad quarter. For example, Matthew Boss of JPMorgan labeled it a Buy at $41 when the year began and stayed with a Buy all year until November, when he went to a Neutral at $17. Mr. Boss, could you take a look at the barn door, please?

Unless Penney is going to go bankrupt -- unlikely in my view -- the stock is a better value at $17 than it was at $41.

The chain still has the advantages of a well-known name, big scale and competitive prices on a wide selection of clothes.

CEO Ron Johnson did great things as a retailing executive at Target, and again at Apple, where he was a driving force between Apple's trendy retail stores. Johnson has been running Penney for only a year. I think he will accomplish a decent turnaround, given a little time.

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