Is JC Penney cheap?

The company gets a new CEO, who happened to be the old CEO, before the current CEO was brought in. Confusing, right? The story with JC Penney is a meandering one, starting with a venerable retail giant coming under assault from online retailers and discount retailers. Bill Ackman, the well known activist investor, took a large position in the company a few years back and started pushing for changes. Those pushes culminated in the hiring of Ron Johnson, the man in charge of building the very successful Apples stores, as CEO.

Mr. Johnson came in with big ideas and a 3-year plan to turn Penney around. Well, I guess it did not work or investors were getting  restless! He was fired yesterday and his predecessor, Mike Ullman, was hired back. The stock price dropped about 13%.

The question for investors then becomes: Is JC Penney cheap now? To answer that question, you can look at three different valuations:

  1. A relative valuation, where you compare JC Penney's trading multiple to those of its peer group (department stores). The excel spreadsheet containing that data is attached, but while the company looks cheap on the surface, there are factors that work against it.
  2. A liquidation valuation, which is very difficult to do from the outside, because you would need both an inventory of assets (real estate investments and business parts) and potential buyers. An article from the New York Times that describes this option is attached.
  3. A DCF valuation. I did put the numbers in for JC Penney and I have to admit that things look bleak. Even assuming that margins converge back to the average for other retailers, the company will have a tough time getting above its debt value. I may be too pessimistic. So, give it your best shot.

Once you get the three values, which one should you use? Depends on who you are (small or large investor, activist or passive investor), what your time horizon is and what probabilities you attach to liquidation and continuing in business!