New buy: JC Penney
I’ve recently bought a position in JC Penney. The JCP transformation is well known. The story became public when Bill Ackmann reported his initial stake in JCP, then his fight to make changes to management, and finally with the appointment of Ron Johnson.
The vision that Ron Johnson has put out for JCP is very compelling. The vision that comes to mind is a mix between Nordstorm’s, Apple Store, and a value conscious buyer. The store-within-store idea is very interesting and it is something that Nordstorm has done very well with showcasing brands within its stores. If JCP is successful in its implementation, the future for JCP is extremely bright and compelling.
When Ron Johnson put out his vision for JCP, the stock took off. Getting to a high of $36/share. Since then the stock has come back down to less than $25. At these prices you are paying a small premium to what Ackmann paid to build his position.
The company has recently hit poor revenue numbers. With any transformation you will see initial hit taken to revenue and the bottom line. What is interesting is the success the company has in cutting off expenses and the ability to sign up brands to JCP’s new vision. I think if you are patient you can see fruits of this transformation in 12-18 months. Some investors have been saying that the fruits will be visible in a few quarters, but transformations always take longer than expected. The company is still building its management team, so give the company some time to start showing results.
The company also owns large amounts of land and has very cheap long-term lease rates. The value of these assets are understated on the financials, due to wonders in accounting. So at current prices you are getting assets that can create some margin of safety.
There are plenty of write-ups online that discuss the valuation for JCP. So no need to restate what is already public. Just look at Bill Ackmann’s detailed presentations and put a decent discount to his numbers, just to be safe.
Doing valuation on JCP is tricky. You get into numbers where you start projecting success on the transformation. With these numbers, the valuation can dramatically change based on how well you think the transformation will go. I basically look at it as what is the worst case situation, the management fails in its transformation and is forced return to previous model of a crappy retailer. In that situation, given the assets on the book, the downside from today’s prices is limited.