NEW YORK (TheStreet) -- If you have not already hopped on the J.C. Penney (JCP) bandwagon, it's not too late. After being left for dead the past couple of years, Penney is coming back. And the once-beleaguered retailer is hitting doubters right in the pockets.
The stock closed Thursday at $9.74, up 4.2%. Shares are up 4.3% so far this year. But that's only part of the story. The stock has surged almost 100% since Penney hit a 52-week low of $4.90 on Feb. 5. Shortly thereafter, I told you Penney would emerge as 2014's best-performing retailer. And I've been right.
Don't let the 100% surge in the past six months fool, however. There's still room on this bandwagon. And if you're smart, you'll hop on now.
Penney's stock can still gain. This is because when compared to rivals Kohl's (KSS) and Macy's (M), Penney is the only one showing any real growth. Yet Kohl's and Macy's trade at higher price-to-book ratios than J.C. Penney. This makes no sense.
Consider that the average retailer trades at a price-to-book ratio of 2. Kohl's and Macy's come at 1.96 and 3.34, respectively. Even Walmart (WMT), which is growing revenue at 1%, commands a price-to-book ratio of 3.27.
Penney's, which just reported 5% year-over-year revenue growth and a narrower-than-expected loss, trades at a price-to-book of 1.04. This discount can only be attributed to the company's recent history of underperformance. Penney's not the same company, however. At some point, J.C. Penney will have to trade on par with its peers, which implies meaningful upside of at least 15% from current levels.
As Penney continues to improve, the market will have no choice but to correct its mistake.
From my vantage point, these shares should be worth between $12 and $15 in the next 12 to 18 months, based on 2015 estimates of a loss of $1.35. As evident by its positive same-store sales (for a third consecutive quarter), management is quickly closing that gap.
Consider that Kohl's just reported a 1.1% revenue decline and a 10-basis point decline in gross margin. This is the second consecutive quarter of declining comparable sales.
Macy's, meanwhile, missed earnings estimates while posting 3.2% revenue growth. But management spooked investors by cutting its comparable-store sales guidance to 1.5% to 2%. At one point, Macy's guided for a high-end range of 3%.
By contrast, Penney just posted 6% jump in comparable-store sales. And the company now projects that number to increase into the mid-single digits for the full year. It's safe to say that Penney stole some market share during the quarter from both Macy's and Kohl's. There's no way to argue against that.
What's more, Penney's ongoing restructuring efforts, aimed at cleaning up its books and cutting costs, is accelerating the pace of this turnaround. No one, except Penney's board, saw this coming.
After the Ron Johnson experiment failed, reinstalling former CEO Mike Ullman as his replacement seemed like a head-scratcher. There were doubts about whether Ullman was up to the task. Today, no one is questioning his capabilities.
Come hell or high water, (or inclement weather) Ullman is fingering out ways to bring back shoppers into his stores. He's implementing strategic merchandising ideas and sales promotions that are attracting traffic. His ideas are also attracting investors. And those still on the sidelines can still get in now and ride this bandwagon up another 25% to 30% by the first quarter of 2015.
At the time of publication, the author held no position in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
Now let's look at TheStreet Ratings' take on this stock.
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 few notable weaknesses, 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, poor profit margins, generally disappointing historical performance in the stock itself and deteriorating net income."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The debt-to-equity ratio is very high at 2.03 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company.
- Current return on equity is lower than its ROE from the same quarter one year prior. This is a clear sign of weakness within the company. 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.
- The gross profit margin for PENNEY (J C) CO is currently lower than what is desirable, coming in at 33.06%. 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, JCP's net profit margin of -12.56% significantly underperformed when compared to the industry average.
- 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 28.13%, 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 change in net income from the same quarter one year ago has exceeded that of the Multiline Retail industry average, but is less than that of the S&P 500. The net income has decreased by 1.1% when compared to the same quarter one year ago, dropping from -$348.00 million to -$352.00 million.
- You can view the full analysis from the report here: JCP Ratings Report