It seems like it’s all bad news for J C Penney Company Inc (NYSE:JCP) these days. JCP stock keeps hitting new all-time lows and it seems a foregone conclusion that the internet is going to put malls and department stores out of business.
Our Josh Enomoto recently gave three reasons why JCP stock will keep falling. He makes some great points. However, at the right price, even a struggling company is worth buying. Here are three reasons why the worst may be over for JCP stock, setting the stage for a big rebound.
Good Debt Profile
For a company to go bankrupt, there needs to be a catalyst. A struggling company doesn’t just give up unless its hand is forced. In the case of J C Penney, the company has quite a few years left to fight because of its strong debt position.
A comparison is in order.
Toys R Us just filed bankruptcy. And some folks are suggesting it’s a bad omen for other struggling retailers. But it’s not. Toys R Us had $3.9 billion in debt coming due by the end of 2020. That’s a monstrous debt load. Without material improvement in their business operations, it is hard to see how they could have made their creditors happy. Given that, suppliers of inventory started to doubt Toys R Us’ ability to pay, and the company preemptively filed bankruptcy in order to carry on operations in an orderly fashion.
However, over at J C Penney, the company has just $800 million in debt coming due over the next three years, despite having a similar revenue base as Toys R Us. There is no reason for suppliers to cut the company off, or for creditors to hound it at this point. While it’s far from certain that J C Penney can permanently right its ship, things are trending in the correct direction, and they have several years to continue executing their stabilization and recovery plan.
Business Isn’t That Bad
The theme that Amazon.com, Inc (NASDAQ:AMZN) is killing all brick and mortar retail outlets continues picking up steam. Previously Amazon-insulated stocks such as pharmacies, grocery stores and auto parts retailers have cratered in 2017, as the Amazon threat has magnified.
However, when you look at the hard data, actual department store numbers haven’t been that terrible. This may be a survival-of-the-fittest scenario playing out. With so many mall retailers failing, shoppers who don’t want a digital experience have fewer options. Particularly in smaller markets where J C Penney anchors a magnet regional mall, it is picking up traffic as competitors fade.
In fact, though you wouldn’t know it listening to the JCP stock bears, revenues actually bottomed in 2014 and are up slightly since then. While the gain isn’t huge, revenues have advanced from $11.9 billion to $12.4 billion over that span. That’s particularly impressive since J C Penney continues to close down under-performing stores. Thus, its revenues are increasingly concentrated at higher-traffic stores that can generate meaningful profits.
The last quarterly report confirms this. J C Penney brought in $3 billion in revenue during a non-holiday quarter for the first time since 2013. Not surprisingly, given that fact, the company is also about to turn profitable again after years of losses. Analysts forecast the company to earn around 35 cents per share next year, putting the forward price-earnings ratio under 10.
Sentiment to Swing
It took long enough, but management’s plan is working. J C Penney has stabilized and is now growing revenues again. It is doing so off a much smaller store base, which has significantly raised its profitability. Sure, the company has a ton of debt, but it has paid a significant amount down and is at minimal near-term bankruptcy risk.
Yet short sellers won’t leave J C Penney stock alone. Short interest makes up an absurd 48% of the stock’s overall float. This number has only risen lately, as short sellers continue to pile into JCP stock as it falls ever-further. That may be working for now, but the return of positive earnings and a stronger-than-expected holiday season could blow the JCP stock short sellers out of the water.
While JCP stock has moved lower over the past month, it’s still only a couple percentage points below its August low. Even with bears pounding the bid, the stock is barely dropping anymore. At some point, this sort of slowing decline tends to lead to a massive rebound. Trading under book value and at less than 0.1 times sales, J C Penney is a dangerous short position — and any positive news could send this stock back toward $5 in a hurry.
Verdict on JCP Stock
The bear argument has some merit. JCP stock continues to decline and the headwinds that Enomoto mentions are real enough. Consumer sentiment is shaky, and it’s easy to understand why given the unusual political developments of the past year. That may hinder holiday sales. Competition is still intense in the retail sector; more bankruptcies are needed to clear out weaker rivals.
All that said, J C Penney’s improving balance sheet strongly suggests that the business will have at least three years to keep performing before creditors come calling. And given rising trends in both revenues and profits, that’s a long time for a $3 stock to potentially get moving to the upside again.
One alternative, if you think J C Penney and other struggling department stores such as Macy’s Inc (NYSE:M) stay in business but don’t thrive, is buying their landlords. The stocks of lower-tier mall operators such as CBL & Associates Properties, Inc. (NYSE:CBL), Washington Prime Group Inc (NYSE:WPG), and Pennsylvania R.E.I.T. (NYSE:PEI) have gotten pounded over the past two years.
As a result, they now yield between 8% and 12%. Those are some huge yields from businesses that still have stable cash flows. If you are bullish on the likes of J C Penney and its peers, but want yield and the security of real estate ownership, they’re a good option.
At the time of this writing, the Ian Bezek owned CBL stock and WPG stock. He had no positions in any other aforementioned securities. You can reach him on Twitter at @irbezek.