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J.C. Penney Company, Inc. (JCP), Best Buy Co., Inc. (BBY): Performance Does Not Indicate Value for these Two Retailers

When Ron Johnson first came to J.C. Penney Company, Inc. (NYSE:JCP) with his “retail success”, there were a lot of people confident in his ability to create the next Sears Holdings Corporation (NASDAQ:SHLD). Since his tenure began, the stock has lost 50% of its value, including 23% this year. On the other hand, fellow retailer Best Buy Co., Inc. (NYSE:BBY) has gained more than 110% in 2013, and is staging what looks like a nice turnaround. Yet despite Best Buy’s large gains, I still think it is fundamentally a better buy over J.C. Penney.

J.C. Penney Company, Inc. (NYSE:JCP)

A Side-By-Side Comparison

To illustrate my belief that despite large gains from Best Buy it is still the cheaper stock, I have included a few key metrics compared to J.C. Penney Company, Inc. (NYSE:JCP). Of course this alone does not tell the story of an investment. However, these are two companies that now appear to be executing the same “mini store” approach and it is possible that some will now look towards J.C. Penney after Best Buy Co., Inc. (NYSE:BBY)’s large run higher. My point is that gains or losses do not equal value, and you can see this fact in the numbers below.

J.C. Penney Best Buy
1. Forward P/E ratio N/A 10.74
2. Price/Sales 0.24 0.15
3. Revenue Growth* (28.4%) 0.20%
4. Operating Cash Flow ($10 million) $1.59 billion
5. 2013 Dividend Yield N/A 3.10%

*year-over-year growth most recent quarter

1. Neither company is profitable at this point in time. However, a stock’s valuation is based on future earnings, and next year is not looking much better in terms of profits for J.C. Penney Company, Inc. (NYSE:JCP). Best Buy is not producing full-year net income, but does have a forward P/E ratio of 10.74. In other words, it is trading at a 30% discount to the S&P 500 relative to next year’s earnings, a clear indication of value.

2. Price/sales is often overlooked for profit, but I prefer sales/valuation as a primary indicator for the mere fact that a company can always manipulate costs to improve earnings but it is harder to produce sales. The price/sales ratios of these two companies is very telling, and is a classic example of stock performance being deceiving, because although Best Buy Co., Inc. (NYSE:BBY) has rallied in 2013 it is still trading at just 40% of J.C. Penny’s valuation compared to sales. Basically, this shows the level at which Best Buy had fallen in recent years and despite large gains it is still remarkably cheap; much moreso than J.C. Penney Company, Inc. (NYSE:JCP).

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