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Stock Shop at J.C. Penney, Pass on Wal-Mart

JCP's management moves should result in future growth


J.C. Penney (NYSE:JCP) imported a handful of executives from winning marketers. Can they change the company’s culture and boost earnings growth? Or is Wal-Mart (NYSE:WMT) a safer bet?

In June, J.C. Penney announced that Ron Johnson, Apple‘s (NASDAQ:AAPL) senior vice president of retail, would take over as CEO effective Nov. 1. Behind that move was an effort by activist investors — William Ackman of Pershing Square Capital Management and Steven Roth of Vornado Realty Trust — who bought 26% and want new management to lift the stock price.

And earlier in October, Johnson announced he was hiring Michael Francis from Target (NYSE:TGT) — where he was chief marketing officer — as president, putting him in charge of merchandising, marketing and product development. Francis and Johnson worked together at Target until 2000, when Johnson left for Apple.

No doubt, JCP shareholders are hoping new management can improve J.C. Penney’s financial track record, which includes three straight annual sales declines before a 1.2% gain in its fiscal 2011.

Meanwhile, competitor Wal-Mart keeps chugging along at a rate of growth that’s too slow to excite shareholders, who have held WMT in a trading range for the past 11 years after decades of explosive stock market growth.

In its most recent quarter ending July 31, Wal-Mart reported a 5.7% profit increase to $3.8 billion, or $1.09 per share — a penny better than expected. Its weak U.S. business overwhelmed its strong international performance.

In short, Wal-Mart has done little to get investors interested in its stock and, absent an exit from the sluggish U.S. market and a doubling down in fast-growing markets like China, there is little hope that Wal-Mart’s management can make such a huge company revert to its double-digit earnings growth path.

Can importing brainpower into J.C. Penney make it a faster-growing company, or will a bad business defeat talented management? Should you invest in JCP and skip WMT? Consider it. Here’s why:

  • Wal-Mart: Slow growth, small margins; expensive stock Wal-Mart’s revenues are up 3.4% to $432 billion in the past 12 months, and net income is up 6.3% to $15.7 billion — producing a thin net profit margin of 3.8%. Its price/earnings-to-growth ratio of 1.38 (where a PEG of 1.0 is considered fairly priced) is expensive on a P/E of 12.81 and expected earnings growth of 9.3% to $4.90 in fiscal 2013.
  • JC Penney: Decent growth, small margins; cheap stock. JCP’s sales are up a meager 1.2% to $17.74 billion in the past 12 months though net income is up 51.8% to $382 million — yielding a small net profit margin of 2.2%. Its PEG of 0.46 (where a PEG of 1.0 is considered fairly priced) is cheap on a P/E of 19.59 and expected earnings growth of 47.84% to $2.09 in 2013.

William Ackman made a failed effort to get an investment in Target to pay off. He appears to be trying to vindicate himself with J.C. Penney. Wall Street seems to think that JCP’s earnings will grow fast in the first year after Johnson takes over — but with its low PEG, many investors are taking a wait-and-see attitude. This could be a buying opportunity.

Meanwhile, Wal-Mart stock is a bit expensive, and it looks like the stock has little chance of reviving unless the U.S. consumer comes back to life.

As of this writing, Peter Cohan did not own a position in any of the aforementioned stocks.

Article printed from InvestorPlace Media,

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