JC Penney: What’s Left for Shareholders?

Another day, another downer for JC Penney (JCP).

Bloomberg

Yesterday, JC Penney fell after Maxim Group said JC Penney didn’t deserve to head higher (although it probably would). Today, shares of the retailer have dropped again after Wells Fargo downgraded its shares. Analyst Paul Lejuez explains why he cut JC Penney:

JC Penney is making progress, but to see the stock up 12% post earnings (vs. the S&P 500 +1%) tells us the market may not be fully appreciating what is priced into the stock right now. We are revisiting our ”Wealth Transfer” thesis, meaning that JC Penney’s high level of debt likely leaves very little value left for equity holders, a concept which we believe is extremely important to understand for those that are intrigued by slightly better comps in Q1. Considering this dynamic, we believe the stock is overvalued at current levels and are downgrading JC Penney shares to Underperform from Market Perform…

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JC Penney’s current EV of $6.9B means they would have to achieve $1.1B in EBITDA for it to have a similar FY2016 EV/EBITDA multiple as Macy’s (M), the clear winner in the mid-tier department store space, in our view. The last time JC Penney achieved that level of EBITDA was before they gave up $5.4B in sales. The thought that they could get back to that level of EBITDA is highly unlikely, in our view, and certainly not likely anytime time soon.

Shares of JC Penney have dropped 3% to $9.08 at 11:55 a.m. today, while Macy’s has fallen 1.8% to $57.04.