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 | |
|---|---|---|
| Price/Sales | 0.26 | 0.21 |
| Forward P/E Ratio | N/A | 12.9 |
| Operating Margin | (13%) | 2.15% |
| 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.
Best Buy has weathered this storm by matching prices, aggressive marketing, and has significant upside due to the balance that online sales tax creates. In the case of J.C. Penney, Ron Johnson was supposed to be the answer, but was not.
After J.C. Penney’s failed Ron Johnson trial as CEO, the company brought back Myron Ullman, but in the process, they have lost 10 senior staff. J.C. Penney has no chief marketing or chief technology officer, nor do they have a head of Home, which is one of their main segments.
J.C. Penney is a company without leadership, and with rumors surrounding its commercial lender CIT Group suspending its finance deliveries. Of course, J.C. Penney denies that CIT has suspended its financing activities, but a report from the reputable NY Post made headwinds on Wednesday with an article suggesting a CIT/J.C. Penney separation. Nonetheless, where there’s smoke there is fire, and I wouldn’t touch this stock.
Final Thoughts
With each passing month, J.C. Penney Company, Inc. (NYSE:JCP) begins to look like the next Circuit City rather than the next Macys. The company has burned through cash, is losing customer loyalty, has no leadership, and there are countless rumors that its relationship with CIT is in jeopardy.
Yet, company bulls hang on the fact that J.C. Penny’s online business is improving rapidly, and that it could supercharge the company’s growth. Unfortunately, J.C. Penney was late to this party as well, and online only accounts for 8% of total sales. Therefore, I see very little light at the end of this tunnel, and since the company’s more expensive that an improving Best Buy, I think more downside could come.
The article Is This Troubled Retail Stock A Buy? originally appeared on Fool.com and is written by Brian Nichols.
Brian Nichols is long BBY. The Motley Fool has no position in any of the stocks mentioned. Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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