Beleaguered mall retailer J C Penney Company Inc (NYSE:JCP) will step up to release its fourth-quarter earnings report after the close of trading tomorrow afternoon, and expectations are leaning heavily bearish.
Wall Street is expecting a profit of 11 cents per share, on average, flat with the same quarter a year ago. Revenue is expected to rise modestly to nearly $3.9 billion.
The company has been on a roll in the earnings limelight, besting Wall Street’s estimates in each of the past four quarters by an average of about 13%. There is evidence to suggest that J C Penney could do the same this quarter, with the company announcing strong January same-store sales growth of 3.7% and forecasting fourth-quarter comparable sales at the high end of its 2%-4% growth range.
Maybe because of this strong fundamental short-term backdrop and the company guidance, EarningsWhisper.com reports that J C Penney’s fourth-quarter whisper number comes in at a hefty 24 cents per share.
That said, this optimism hasn’t spilled out into the rest of JCP stock’s sentiment backdrop. For instance, data from Thomson/First Call reveals that only five of the 27 analysts following JCP rate the stock a “buy,” compared to 12 “holds” and 10 outright “sell” ratings. Additionally, the 12-month consensus price target of $8 represents a discount to yesterday’s close at $8.89.
From a contrarian perspective, there is ample room for potential upgrades or price-target increases, J C Penney only has to give these naysayers reason to change their positions.
Short-term options traders are just as bearish as their brokerage community counterparts. In fact, the weekly Feb. 27 series put/call open interest ratio comes in at 1.35, with puts easily outstripping calls among options set to expire at the end of this week. Peak put open interest resides at the out-of-the-money $8.5 strike, totaling 16,779 contracts, while another 10,119 puts reside at the $7.5 strike.
Click to Enlarge Overall, weekly Feb 27 series implies are pricing in a potential post-earnings move of about 10%. This places the upper bound at $9.95, while the lower bound lies at $8.05. A rally to the $10 region would put JCP at its highest point since October, with the shares on the verge of breaking out of single-digit territory.
Meanwhile, a decline would threaten support at the $8 region, with follow-through selling potentially sending JCP down for a test of its 50-day moving average.
2 Trades for JCP Stock
Call Spread: For those traders willing to take a chance and bet against the grain, a Mar $8.50/$10 bull call spread has some considerable profit potential. At last check, this spread was offered at 40 cents, or $40 per pair of contracts. Breakeven lies at $8.90, while a maximum profit of $1.10, or $110 per pair of contracts, is possible if JCP closes at or above $10 when March options expire.
Traders should also be aware that this spread could double (at $9.30) or even triple ($9.70) before hitting its maximum profit potential — so set your limit orders accordingly.
Put Sell: If you’re not sold on JCP’s rally potential, then weekly Feb 27 series $7.50 put sell may be more to your liking. At last check, this put was bid at 5 cents, or $5 per pair of contracts. As always, you keep the $5 premium for this put sell as long as JCP closes above $7.50 when weekly February options expire this Friday. However, if JCP trades at or below $7.50 prior to expiration, then you could be assigned 100 shares of JCP for every one contract sold at a cost of $7.50 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
