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Why Bill Ackman is Patient with JC Penney $JCP?

PERSHING SQUAREJC Penney (NYSE:JCP) is in the middle of a turnaround.  There could be a couple of more negative quarters where the market will react by pushing the stock price down.  Once JCP has their pricing strategy in play, there will be less pressure on gross margins that will lead to a better bottom line thus increased earnings.   JCP should be seen as a long term investment for investors who can deal with earnings volatility in the next 4 quarters.

CEO Ron Johnson was brought in to turnaround this retail giant.  Johnson also brought in another Apple exec, Daniel Walker, former chief talent officer at Apple, is the new JCP chief talent officer. And Michael Kramer, was president and CEO at Kellwood Co. become Penney’s chief operating officer last December. Prior to Kellwood, he was chief financial officer for Apple’s retail division from 2000 to 2005. JC Penney also hired Target’s top marketing executive, Michael Francis, as its new president.  If there is any team that can turn around this floundering retail giant, this is the one to bet on. 

The retail clothing industry is under a dramatic change.  As Eddie Lampert mentioned in his CNBC interview, “You’re (retail) going to have to try new things.” He points to the media industry as an industry that is embracing change in various ways to deliver content.  He used Tesco as an example of a retailer that is trying different things.  Retail has been great for the consumer, not so much for business (shareholders).  Amazon (NASDAQ:AMZN) and Ebay (EBAY) have turned this into a huge opportunity.  What separates retailers such as JCPenney from buying clothes online from Amazon is the experience people have when shopping for clothes.  People have to try on clothes to make sure they fit.  This is particularly true of young teens and children who are growing.

The numbers:

JCP has an EV/EBITDA of 9.34, and an EV/Revenue of .54.  Its EPS is -.71.  So how does it stack up against its competitors Macy’s (NYSE:M) and Dillard’s (NYSE:DDS)?

JCPenney (JCP) Macy’s (M) Dillard’s (DDS)
Stock Price $ 34.97 $ 40.87 $ 63.52
Mkt Cap ($M) $ 7,630.00 $17,100.00 $ 3,140.00
Enterprise Value (EV) $ 9,230.00 $21,960.00 $ 3,820.00
% off 52Wk Low 49.2% 80.4% 62.9%
Multiples
P/E(TTM) N/A 14.0 7.3
P/S(TTM) 0.4 0.7 0.5
P/Tang BV(MRQ) 1.9 10.7 1.5
P/CF 20.9 7.3 4.4
P/FCF(TTM) 954.2 14.5 8.4
EV/EBITDA(TTM) 9.2 6.3 5.6
EPS ($) $ -.71 $ 2.92 $ 8.52
Dividend Yield 2.3% 2% .30%

On a side by side comparison, it seems JC Penney wants Dillard’s steady earnings, and its favorable capital structure.  Due to the new pricing strategy, JC Penney will have mixed earnings for the rest of 2012.  We recommend that the enterprising investor purchase JCP with the expectations that the company experiences growing pains.  Dillard’s is an option for those investors who want to be in the retail space but don’t want to deal with a corporate turnaround.   After JCP’s pricing strategy takes effect, however, the price of the stock will reflect JC Penney’s increased profitability.  Bill Ackman has a huge position in JC Penney and thinks the stock is going to $70 over the next couple of years. Other fund managers such as Whitney Tilson, and Michael Price have also invested in JCP.

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