Why J.C. Penney (JCP) Is Gaining Today

NEW YORK (TheStreet) -- J.C. Penney (JCP) was gaining 9.3% to $9.20 Tuesday after Citigroup (C) upgraded to retailer to "buy" from "neutral."

The bank also raised its price target for J.C. Penney to $11 from $7.50. Analysts Oliver Chen, Maryana Pleskanka, Nancy Hilliker, and Vivien Azer called the company an "American comeback story," saying the can continue to turn around sales. The analysts believe focusing on the home and kids departments will help the retailer.

According to the analysts J.C. Penney can drive comp and healthier margins through "(1) home department which is ~12% of mix and had severe space/product disruptions in 1H13; a revamped Home Collections at JCP has better price/value, renewed focus on bedding/bath/small electrics & decorative accessories; (2) fixing kids (~12% of mix), which was disrupted in 2H13 given space allocation to ideas which did not resonate; (3) fixing the mix of private, exclusive, & national brand merchandise that better resonates with the JCP customer (private brands ~30% under Johnson vs. ~50% historically, & have 400-500bps benefit vs. national brands). If 20% of JCP's business mix (home and kids ~20-25% of total) can comp +20% this yields a 5% benefit."

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TheStreet Ratings team rates PENNEY (J C) CO as a Sell with a ratings score of D. TheStreet Ratings Team has this to say about their recommendation:

"We rate PENNEY (J C) CO (JCP) a SELL. This is driven by a number of negative factors, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its generally high debt management risk, disappointing return on equity, weak operating cash flow, generally disappointing historical performance in the stock itself and poor profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Currently the debt-to-equity ratio of 1.81 is quite high overall and when compared to the industry average, suggesting that the current management of debt levels should be re-evaluated. To add to this, JCP has a quick ratio of 0.53, this demonstrates the lack of ability of the company to cover short-term liquidity needs.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Multiline Retail industry and the overall market, PENNEY (J C) CO's return on equity significantly trails that of both the industry average and the S&P 500.
  • Net operating cash flow has decreased to $383.00 million or 40.62% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
  • JCP's stock share price has done very poorly compared to where it was a year ago: Despite any rallies, the net result is that it is down by 40.13%, which is also worse that the performance of the S&P 500 Index. Investors have so far failed to pay much attention to the earnings improvements the company has managed to achieve over the last quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
  • The gross profit margin for PENNEY (J C) CO is currently lower than what is desirable, coming in at 28.40%. Regardless of JCP's low profit margin, it has managed to increase from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 0.92% trails the industry average.
  • You can view the full analysis from the report here: JCP Ratings Report

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Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer or Stephanie Link.

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