A valuable stock in the short term?
A few weeks ago, I wouldn’t have hesitated to recommend buying J.C. Penney stock, but the recent dismissal of CEO Ron Johnson, the man who created the Apple stores, makes me rate it as a hold case now. Like Bloomberg Businessweek acknowledges, “firing Ron Johnson won’t be a Panacea for J.C. Penney Company, Inc. (NYSE:JCP).” Although Johnson didn’t quite deliver the expected results, replacing him with Mike Ullman, who had in turn been laid off and substituted by Johnson in late 2011, is probably not the most creative move, but does serve the purpose of stabilizing the business.
Despite the negative remarks, one cannot catalogue J.C. Penney Company, Inc. (NYSE:JCP) as a failure or a sell case. As stated by Zacks analysts, “J. C. Penney´s well diversified supplier base, compelling private and national brands, marketing campaigns, point-of-sale technology initiatives as well as effective cost and inventory management should drive sales and margin trends over the long-term.” Furthermore, Johnson´s renewed strategy has retrieved some good results as the new standalone stores, not located in malls like they used to be, offer higher margins and growth than the mall-based stores. Actually, sales per square foot in these shops double the ones in old locations.
Sephora, J.C. Penney Company, Inc. (NYSE:JCP)‘s cosmetics company, provides extra confidence to stockholders as it continues to outperform in attracting younger and wealthier customers. Meanwhile, other revamping plans for J.C. Penney Company, Inc. (NYSE:JCP), like a new pricing strategy, various merchandise and cost reduction initiatives and overhauling of the clients’ shopping experience, have meant an $800 million reduction in costs for FY 2012 and are expected to deliver another $900 million in savings by the end of FY 2013. Although currently going through a rough patch, I would not lose track of
this company as it might become a value investment any time soon.
While J.C. Penney Company, Inc. (NYSE:JCP)’s stock fell by over 50% since Ron Johnson assumed the CEO mantle, Macy’s stock rose by more than 40% over the same period. Although currently at a 52-week high of $46.64 (as of May 8th), meaning that the market share gained from J.C. Penney is already priced in the shares, I would still recommend buying, like Barrons and Morningstar analysts consensuses suggest.
Comps are expected to grow by 3.5% during FY 2013 as a result of price and inventory management optimizations, private label offering and merchandise planning.
The Omni-channel strategy has returned amazing results, as online sales grew over 48% just during January 2013. Capital investments like the Arizona fulfillment center expansion certainly prove management’s confidence in the future results of the online sales plan.
An active management of free cash flows has ameliorated Macy’s, Inc. (NYSE:M) capital structure. In 2012, alongside repaying debt of $1.8 billion and making some necessary investments, the company paid considerable dividends, yielding 1.79%, and repurchasing stock for $1.35 billion. Furthermore, having the company generated over $2.2 billion in in net cash flow from operating activities (FY 2012), CFO Karen Hogue recently declared that excess cash will be used for further stock buybacks for over $1.5 billion and an increase in the already substantial dividend yield.
Strong fourth quarter results portray an encouraging outlook as sales increased by 7%, year over year, to $9.35 billion and earnings grew by 20%, reaching $2.05 per share and beating Zacks Consensus Estimate by 7 cents. This is not the first time results have come in better-than-expected. Macy’s, Inc. (NYSE:M) earnings have been outperforming estimates by an average of 38.5% for 11 consecutive quarters now. Initiatives described above lead me to believe that this trend will continue.
In terms of valuation, Macy’s, Inc. (NYSE:M) trades at 13.7 times P/E, a discount price relative to its peers, which exchange, in average, at 16.9 times P/E.
A good pick
Although at first I felt a little hesitant about Nordstrom, Inc. (NYSE:JWN), I now believe that overweighting its stock would not be a bad idea. As stated by seekingalpha.com analysts, this company offers sustainable payouts and strong sources of profitability. Below I will list the principal reasons to believe that Nordstrom, Inc. (NYSE:JWN) is a good pick:
The company yields over 2% in dividends while offering a sustainable 30% dividend payout ratio. Both of them rank better than the respective 1.86% and 69% industry medians.
In terms of valuation, Nordstrom, Inc. (NYSE:JWN) trades at just 14.78 times P/E consensus estimate, at a considerable discount versus the industry average of 23.26 times P/E.
In terms of profitability, the company currently offers an operating margin of 11.1%, close to its 11.5% historic high and considerably above the 2.2% industry average. Same is the case of the net margin of 6.1% and Revenue and EDIBTDA Growth rates of 10.7% and 13.4%, respectively.
The company possesses a strong brand image that attracts an upscale clientele, allowing a wider margin generation. However, it combines exclusive brands and products with more inclusive merchandise to differentiate from other mall-based department store retailers, thus alluring a wider public, too.
Strong fourth quarter FY 2012 results surpassed consensus estimates and created a promising outlook. Management estimates earnings for 2013 to reach $3.65-$3.80 per share, based on estimated sales growth of 4.5% to 6.5%. Share repurchases could lower the earnings a little bit but stockholders would still be benefited.
The firm continues to focus on store base expansion as a top line growth driver. Several store openings are planned for 2013 in addition to the ongoing strategy to strengthen its presence is both Canada and Manhattan, which, as Zacks analysts assure, “should not only boost market share but also improve longer term top-line trends.”
Bottom line
While George Soros decided to buy J.C. Penney Company, Inc. (NYSE:JCP) less than a month ago and is already seeing a 20% upside on the stock price, I would recommend holding on this company as several reasons lead to an unstable situation with unpredictable results. Extra reasons to hold are provided by the insider sales of Roth Steven, Director, and Vornado Realty Trust, 10% owners. Each of them sold 10 million shares less than a month ago. This is usually not a sign that indicates that they necessarily trust future results.
In line with Deutsche Bank, I would advocate investing in high-income focused retailers, like Macy’s, Inc. (NYSE:M), over J.C. Penney, which have provided wide gains over the past few years. Trading at 11.43 times 2013 consensus estimate, I would believe that a good entry point is available.
The article 3 Retail Stocks to Keep an Eye On originally appeared on Fool.com and is written by Victor Selva.
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