Anatomy of a Trade: Cashing In On J.C. Penney’s Turmoil

As we bask in the downfall of the former CEO . . .

The J.C. Penney Company/Bill Ackman saga has been going on for a while.  It took a turn earlier this week when Ron Johnson, Ackman’s CEO pick and former Apple executive (responsible for the Apple stores), stepped down amid poor (to say the least) results.  Terms like “doomed” and “plunging were bouncing about as shares of JCP plunged 12.22% on Tuesday.  That’s where we step in.

On Wednesday morning, we watched as the JCP shares fell a bit more but seemed to hit a floor in the high $13.60’s.  So is there another reason to buy?  Let’s look at a few key numbers.

JCP lost almost $1 billion last year, as sales bombed and gross margin declined.

The net loss for 2012 included:

  • $155 million of markdowns related to inventory changes for its new strategy from a promotional department store to a specialty department store;
  • $298 million of restructuring and management transition charges;
  • $315 million for benefit plan effects; and
  • $397 million gain on the sale or redemption of non-operating assets.

Is this good news?  Not really, but the people associated with it are gone.  It will mean some more money to fix the problem, but the problem associated with the strategic misstep is going away.

Second, J.C. Penney owns real estate and buildings (other than furniture) of about $4.2 billion.  With about 220 million shares outstanding, this alone amounts to about $19.10/share.  It probably is not worth that much if they tried to liquidate (I assume, considering the malls where I expect to see a J.C. Penney), but $5 or $6/share write-down seems excessive.  Even if they are going to blow through more cash and experience liquidity problems, they have enough of an asset base to draw upon.

Along that same theme, J.C. Penney has $9.8 billion in total assets against $6.6 billion in total debt, or about $14.40/share.  Even in a liquidation scenario, the debt can be paid off with residuals to the common stockholders in excess of JCP’s Wednesday morning share price.

Even if they spend another $1 billion to turn it around in 2013, it would be about $4.54/share hit, which would put that morning’s share price underwater, but it would not be completely catastrophic.

Our guess is that bringing back the old CEO, even on an interim basis, would give shareholders hope for the future, rather than cause an application of an additional discount to the assets, prospects and stock price.

For that reason, we bought at $13.7154 this morning.  It was the chance to get in below the book value in a multi-billion company that has at least one billionaire (or at least multi-millionaire) investor looking for a way to make up his losses.  We are up 2.73% as of this writing with JCP having closed at $14.09.  Not bad for one day.

We believe this is a short term play.  This is a very troubled company with an expensive proposition to right the ship.  However, Tuesday appeared to be a severe overreaction.  We’ll watch it closely and probably put in a trailing stop order or a sell order soon.  But, it could be a “Hold Until Something Better Comes Along” play, but we do not consider it a core or long-term holding at this point.

J.C. Penney Form 10-K
J.C. Penney Form 8-K Announcing CEO Departure



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