The once proud name of American middle market retailing has had its stockholders played for suckers by a city slicker named Ron Johnson, who thought he could make the old dog cool again with some ribbons and a strategy born in Silicon Valley.
Unfortunately, J.C. Penney Company, Inc. (NYSE:JCP)’s was selling knives and clothes, not iPads. The strategy was imposed from the top-down, all at once, and never tested. The old customers left and the new ones never came in. Sales collapsed, and the company might be heading to Chapter 11 now had not Johnson been fired, replaced by the “failure” who came before him.
Despite this a whole lot of smart money, including Georges Soros and Goldman Sachs, have since flocked into the stock and its bonds. Before deciding whether to join them, it would be good for you to ask why that is.
It Could Be Sears
Under Eddie Lampert, Sears Holdings Corp (NASDAQ:SHLD) has not been setting the world on fire, but it is holding its own. If Ullman can do as well as Sears Holdings Corp (NASDAQ:SHLD) is doing, something he’s capable of doing, new buyers of J.C. Penney Company, Inc. (NYSE:JCP) shares will be doing quite well.
Sears Holdings Corp (NASDAQ:SHLD) has had declining sales for years, but it still did almost $40 billion in revenue during 2012. It lost a little over $1 billion during the year. For the quarter ending in February losses accelerated, to $626 million on sales of $12.26 billion.
Yet the company still maintains a market cap of about $31.94 billion. Share prices are actually up 23% during the year. Ned Davis Research recently raised its rating on the stock to neutral.
What’s going on? The company has assets worth $19 billion. It still has some brands performing well, like Kenmore appliances and Craftsman tools. Against $39.8 billion in sales, you have $31.94 billion in shareholder value. That’s about $5 in sales for every $4 in equity.
By contrast, J.C. Penney Company, Inc. (NYSE:JCP) had sales of $12.98 billion and equity of $3.79 billion. That’s more than $3 in sales for every $1 in equity. So if Penney’s were run as “well” as Sears (and few think Sears is run well) it could be worth more than twice what it’s presently worth.
There’s an old saying that when two men are running from the bear, you don’t have to be faster than the bear, just the other guy running. Is Mike Ullman faster than Eddie Lampert? Well, Ullman is at least a retailer, while Lampert is a real estate guy. Smart money says he’s at least as good.
It Could Be Bon-Ton
Of course, things could be worse for J.C. Penney. It could be The Bon-Ton Stores, Inc. (NASDAQ:BONT).
The Bon-Ton Stores, Inc. (NASDAQ:BONT) is, like J.C. Penney Company, Inc. (NYSE:JCP), a mid-market department store retailer. It’s based in York, Pennsylvania. It has 272 stores operating under a variety of brands, including Parisian.
Like Sears and Penney’s, The Bon-Ton Stores, Inc. (NASDAQ:BONT) is losing money. Last year, it lost $21.5 million on sales of $2.97 billion. Despite the fact that many of its Midwest markets are on the comeback trail, its total market cap is just $303 million. That means stock buyers are paying just 10 cents for each $1 in Bon-Ton sales.
That’s the pit that J.C. Penney bears see yawning before the company. If Penney’s were selling like Bon-Ton, it might be worth just one-third what it is. Despite the fact that there are no indications Bon-Ton is about to go bankrupt – it’s actually paying a dividend – you can see this as a worst-case scenario for the stock. Money can still be extracted.
The future for J.C. Penney Company, Inc. (NYSE:JCP), based on its current stock price, probably lies between these two extremes.
The Foolish Bottom Line
There are many ways in which a large investor can get their money out, ways that may not be open to a small investor. Large investors can even take advantage of bankruptcy in ways that would bankrupt small ones.
But the fact is that is Ullman can just perform as well as he did before the Johnson debacle, the value of J.C. Penney Company, Inc. (NYSE:JCP) will go up. That, plus the low costs of borrowing, have given him that chance, and smart investors are loading up, not in expectation of a home run this time, but maybe a single, stolen base, and a ground ball with eyes.
They think the odds of that are fairly good. I do, too.
The article Why the Smart Money Believes in J.C. Penney originally appeared on Fool.com and is written by Dana Blankenhorn.
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