After a near 60% decline since the start of 2012, some analysts are beginning to support J.C. Penney Company, Inc. (NYSE:JCP) due to its valuation. However, is the stock’s price fooling you, or is there real value in J.C. Penney Company, Inc. (NYSE:JCP)?
Finding Value, Not Performance
One of the biggest problems that investors make is mistaking value with price. An investor might think that a stock is presenting value if it has declined 25% in eight months time (like J.C. Penney). It is easy to fall in this trap when analysts begin to suggest a bullish outlook. However, true value is only defied by a company’s valuation relative to its fundamentals, and then its comparison to competitors.
In the case of J.C. Penney Company, Inc. (NYSE:JCP), there are logical reasons to explain the company’s fall from grace. Not only did sales fall 25% in its last fiscal year, but its Q1 2013 produced an additional 16% top-line loss in comparison to the company’s horrendous fiscal 2012. Therefore, it is hard to find reasons to be optimistic.
Is It Cheap?
Some people invest in J.C. Penney Company, Inc. (NYSE:JCP), saying “it’s cheap.” Well, let’s take a look at another retail stock, Best Buy Co., Inc. (NYSE:BBY), which has traded higher by 160% in 2013 to determine if J.C. Penney is cheap.
|J.C. Penney||Best Buy|
|Forward P/E Ratio||N/A||12.9|
|Total Debt||$3.83 billion||$1.69 billion|
Best Buy Co., Inc. (NYSE:BBY) has traded with gains this year, yet despite J.C. Penney Company, Inc. (NYSE:JCP)’s loss, Best Buy is still the cheaper stock at 0.21 times sales. Moreover, Best Buy is expected to become profitable next year, while J.C. Penney is still far from reaching any level of profitability.
Best Buy Co., Inc. (NYSE:BBY) has a very strong financial position, with $14.3 billion in assets and just $1.69 billion in debt. J.C. Penney’s financial position is always being monitored, as the company approaches a debt-to-assets ratio near 40%. Then, of the $10 billion in total assets on J.C. Penney’s balance sheet, over 20% is in inventory, showing how J.C. Penney has been unable to move product.
With all things considered, I find it hard stretched to call J.C. Penney Company, Inc. (NYSE:JCP) a value stock, and believe that any investor identifying value, is simply using price performance as their gauge. This is a company with weakness at every level of its business.
More Problems Ahead?
Some might believe that comparing a clothing and technology retailer is unfair. However, the two companies are closer in comparison than most realize: Both operate with a large sum of physical assets, large store space, and have been negatively affected by the presence of e-commerce.