Macy’s, Inc. (M), J.C. Penney Company, Inc. (JCP): Are These Department-Store Giants As Similar As They Appear?

Valuation

The point of that J.C. Penney rant is to emphasize that these are truly two different kinds of investments.  J.C. Penney works purely as a speculative play right now, and with the higher risk comes higher potential rewards.

For example, if the company achieves a 13% operating margin as planned, and builds sales back up to around $15 billion, which I think is conservative; this would translate to $8.90 per share in earnings.  So, if everything goes according to plan, J.C. Penney’s is trading at just 2.2 times 2016’s earnings.  However, that is a big “if.”  This one can go sour in a hurry if the company’s efforts don’t produce the desired effect.

Macy’s, on the other hand, is a much more stable investment, and I think it is very attractively valued right now, at just 12.4 times earnings with 14.8% annual forward growth projected.  As such, a comparison with J.C. Penney is not very useful.  I would be more inclined to compare Macy’s with a department store chain in similar financial shape, such as Kohl’s Corporation (NYSE:KSS).

Kohl’s actually trades at a lower valuation of just 11.2 times current-year earnings; however their 3-year average annual growth estimates are just 6.8%.  This growth is in line with the valuation, however is not nearly as attractive as Macy’s.

The Bottom Line

Which department-store chain you should ultimately decide to put your money in is all about the risk tolerance you have.  There are high-risk, medium-risk, and low-risk choices out there.

Companies that may or may not make money, like J.C. Penney’s, are high-risk.  While they have the most potential to lose money, they can also pan out wonderfully if things go well.  If the company actually meets their ambitious goals by 2016, this could be a $100 stock.

Medium-risk would be companies like Kohl’s or Macy’s, of whom I think Macy’s is very attractive right now.  For those investors with a low risk tolerance, specialty retailers are probably not for you, and the best bet is a giant retailer who sells almost everything, like Target Corporation (NYSE:TGT), which also reports earnings next week.  As a less-risky play, Target trades at a slightly higher 13.7 P/E multiple with projected forward growth of 10.8%, and in my opinion, is one of the safest ways to get exposure to the up-trending retail sector.

The article Are These Department-Store Giants As Similar As They Appear? originally appeared on Fool.com and is written by Matthew Frankel.

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