Mon 11/13/06 Updates & JCPenney Analysis
Mom asked me about JCPenney (stock symbol JCP) today and it's quite an interesting stock to consider. For one thing JCP has a rating of one star from Morningstar (M*) which doesn't matter because of the behavior of the fair value estimates over the last five years. The M* rating is only a representation of the relative difference between a percieved fair value for a stock and it's actual trading price. If the perception is a fair value below the actual trading price then the star rating can be low, like a one but, if the fair value is above the actual trading price then the rating will be high, like a 4 or 5.
A case where a five star rating doesn't mean squat would be with a company like Apollo Group (APOL) which is rated 5 stars but it's fair value has been going down - along with it's stock price. At the end of 2004 APOL had a fair value of $114/share when it was trading for a high of $84.83 so, it was rated five stars. Unfortunately, the fair value has dropped 5 times since then to it's current $65 estimate & actual trading price of $34.05/share.
JCP is a one star stock which hit a low of $9.63 in November of 2000 and has risen to it's very stately per share price of $78.74 as of close today. We can only research past fair values for five years but, in November of 2001 M* had JCP's fair value estimated at $21/share when it was trading around $25.
If you plot the fair value estimate (FVE) on a graph you'll see straight flat lines which stay flat until the FVE changes, either for better or words, then you'll see that line jump or fall accordingly while the actual stock price, on the other hand, constantly goes up and down. Until about November of 2003 the FVE of JCP was above the actual trading price two periods and below it a couple times so the M* rank varied but since November of 2003 the FVE has been below the actual trading price so the rating remains a one.
BUT - in the past five years the FVE of JCP has risen eight times!
So, this is a fine example of when a 1 star rated stock is far superior to a 5 star rated stock.
So, we have here a stock that's gone up 717.6% in the past 6 years ...quite impressive and makes me have to look at the technicals of the stock; that includes things like the MSCD Oscillator, Bollinger Bands and Parabolic Time/Price ratios - basically things most people have never heard of but, we can break it down into easily understandable terms
Short Term Indicators - 80% Buy
Medium Term Indicators - 100% Buy
Long Term Indicators - 100% Buy
I'm thinking to myself that I *did* need to add a Consumer Services type of stock to my portfolio and I'm thinking maybe Mom just found one for me!
JCP has Average business risk and no economic moat but, it does have a Stewardship Grade of B. What's really impressive, to me, is the P/E ratio is only hat 17.90! How does a stock go up over 700% and still maintain a P/E ratio under 20? ....gotta be increasing revenues, right?
Well, took a while with the M* stock screener but I did find that JCPenney has had increasing revenues and positive earnings per share for the past two years. I thought it might have been a bit longer than two years.
Below we have an Analysis from M*
JCP Thesis by Kimberly Picciola 05-23-2006
J.C. Penney is returning to growth mode with plans to add 175 off-mall locations by 2009. Additionally, the company has partnered with cosmetics retailer Sephora to sell more high-end cosmetic products in its stores. Although we think J.C. Penney will continue to face tough competition, we now view its growth prospects over the next three to four years more favorably.
Consolidation was rampant among department stores in 2005, and J.C. Penney is hoping to benefit from its competitors' distractions. As Sears SHLD focuses on moving its merchandise off the mall and Federated focuses on moving its merchandise off the mall and Federated FD
integrates May into its business, J.C. Penney is making a move to lure middle-income consumers back to its stores. Its solid performance in recent quarters indicates that this almost forgotten department store chain is making progress.
The turnaround plan, initiated in early 2001, has focused on reconnecting J.C. Penney with its target consumer, improving the in-store shopping experience, and centralizing functions, such as merchandising, to reduce costs and improve efficiency. Thanks to this effort, the top line has grown, operating margins have risen consistently, and inventory is under better control. We anticipate margins will show modest improvements over the next five years as J.C. Penney continues to benefit from its restructuring efforts and its additional off-mall locations.
Although J.C. Penney's recent operating margin expansion and comparable-store sales results have been impressive, we believe the retail environment remains challenging. The department store chain will have a tough time keeping its customers from shopping more at Kohl's KSS
and Target TGT. Over the past five years, these two off-mall chains have expanded while J.C. Penney has closed more stores than it has opened. Although J.C. Penney plans to increase its square footage over the next five years, it has a lot of ground to cover to catch up to its closest competitors.
In addition to competing with off-mall retailers, J.C. Penney is up against other traditional department stores and specialty retailers, which have flourished recently. Despite being a retailer for more than 100 years, J.C. Penney hasn't created an economic moat to keep competitors at bay, in our opinion. We think the battle for the moderate consumer's discretionary income will continue making it difficult for J.C. Penney to develop a sustainable competitive advantage.
Valuation
After incorporating J.C. Penney's expansion plans into our model, we are increasing our fair value estimate to $55 per share. The company plans to add 175 off-mall locations by 2009. Combining this with anticipated same-store sales growth in the low single digits, we think total revenue will grow at an annual rate of 5%, on average, over the next five years. As a result of growth in off-mall locations (which we believe are less costly to operate than mall-based stores), we expect operating margins to reach around 9.5% by 2009. Although management expects 10%-10.5% operating margins by 2009, we are not quite as optimistic. We think continued competitive pressure from Kohl's, Target, and Federated will make it challenging for J.C. Penney to gain the operating leverage necessary to hit management's margin targets. Additionally, the retailer remains vulnerable to a challenging macro environment and fickle consumers who have a growing number of choices when it comes to apparel, home fashions, and other discretionary goods. If we did assume operating margins hit 10% by 2009, our fair value estimate would be upward of $60 per share.
Risk
J.C. Penney faces a tough competitive environment. Not only is Target upgrading its apparel assortment to appeal to a more middle-income consumer, but Federated will have a national brand under the Macy's nameplate at the end of 2006, strengthening its position in the traditional department store sector. Any merchandising missteps or execution mishaps could limit J.C. Penney's ability to generate positive same-store sales growth and increase profits.
Strategy
After years of operating practices that hurt sales growth and profitability, J.C. Penney has emerged from its turnaround with more centralized decision-making to reduce operating expenses and improve efficiency. The company is focused on optimizing its merchandising mix, refining its in-store presentation, and expanding its off-mall store base.
Management & Stewardship
Myron "Mike" Ullman became chairman and CEO in December 2004. He has a strong background in retail, including group managing director of LVMH Moet Hennessy Louis Vuitton and chairman and CEO of the Macy's department store chain in the early 1990s. His total compensation in 2005 was nearly $4.8 million (with the majority of it variable and based on the company's performance), which we think is reasonable given J.C. Penney's solid performance under his leadership. While there is a long-term component to his compensation, we don't think the goals associated with it were clearly outlined in the proxy. We like that 10 of the 11 board members are independent, and we applaud the board for listening to its shareholders and putting members up for election annually, rather than every three years. With the change to elect directors on an annual basis, we have a more favorable view of J.C. Penney's corporate governance. Overall, we think it is above average.
Profile
J.C. Penney operates more than 1,000 department stores in the United States and Puerto Rico. Additionally, it sells its merchandise and services through its catalog and Web site, which hit the $1 billion sales mark in 2005. Around 40% of its merchandise is private label and includes exclusive brands such as St. John's Bay, Arizona, and the Chris Madden home collection.
Growth
Sales growth has been anemic for years because of a sizable disconnect between strategy and execution. We expect the company will generate average annual growth of around 5% over the next five years, driven by low-single-digit growth in same-store sales and 3% square footage growth.
Profitability
Returns on equity and assets have improved since the turnaround plan was initiated in early 2001. Management hopes to continue this trend by paring inventory and improving product selection.
Financial Health
The company used cash from the sale of the Eckerd drugstore chain to pay down debt and shore up its balance sheet. With operational improvements, J.C. Penney's financial health should continue to improve.
Major Markets; DWDI, LISA, SPDRs & Diamonds
Day Ending Scores
Daily recap for the 10 Stocks that make up the Dollar Wise Decisions Index (DWDI)
Daily recap for the 10 Stocks that make up The LISA Portfolio
A case where a five star rating doesn't mean squat would be with a company like Apollo Group (APOL) which is rated 5 stars but it's fair value has been going down - along with it's stock price. At the end of 2004 APOL had a fair value of $114/share when it was trading for a high of $84.83 so, it was rated five stars. Unfortunately, the fair value has dropped 5 times since then to it's current $65 estimate & actual trading price of $34.05/share.
JCP is a one star stock which hit a low of $9.63 in November of 2000 and has risen to it's very stately per share price of $78.74 as of close today. We can only research past fair values for five years but, in November of 2001 M* had JCP's fair value estimated at $21/share when it was trading around $25.
If you plot the fair value estimate (FVE) on a graph you'll see straight flat lines which stay flat until the FVE changes, either for better or words, then you'll see that line jump or fall accordingly while the actual stock price, on the other hand, constantly goes up and down. Until about November of 2003 the FVE of JCP was above the actual trading price two periods and below it a couple times so the M* rank varied but since November of 2003 the FVE has been below the actual trading price so the rating remains a one.
BUT - in the past five years the FVE of JCP has risen eight times!
So, this is a fine example of when a 1 star rated stock is far superior to a 5 star rated stock.
So, we have here a stock that's gone up 717.6% in the past 6 years ...quite impressive and makes me have to look at the technicals of the stock; that includes things like the MSCD Oscillator, Bollinger Bands and Parabolic Time/Price ratios - basically things most people have never heard of but, we can break it down into easily understandable terms
Short Term Indicators - 80% Buy
Medium Term Indicators - 100% Buy
Long Term Indicators - 100% Buy
I'm thinking to myself that I *did* need to add a Consumer Services type of stock to my portfolio and I'm thinking maybe Mom just found one for me!
JCP has Average business risk and no economic moat but, it does have a Stewardship Grade of B. What's really impressive, to me, is the P/E ratio is only hat 17.90! How does a stock go up over 700% and still maintain a P/E ratio under 20? ....gotta be increasing revenues, right?
Well, took a while with the M* stock screener but I did find that JCPenney has had increasing revenues and positive earnings per share for the past two years. I thought it might have been a bit longer than two years.
Below we have an Analysis from M*
JCP Thesis by Kimberly Picciola 05-23-2006
J.C. Penney is returning to growth mode with plans to add 175 off-mall locations by 2009. Additionally, the company has partnered with cosmetics retailer Sephora to sell more high-end cosmetic products in its stores. Although we think J.C. Penney will continue to face tough competition, we now view its growth prospects over the next three to four years more favorably.
Consolidation was rampant among department stores in 2005, and J.C. Penney is hoping to benefit from its competitors' distractions. As Sears SHLD focuses on moving its merchandise off the mall and Federated focuses on moving its merchandise off the mall and Federated FD
integrates May into its business, J.C. Penney is making a move to lure middle-income consumers back to its stores. Its solid performance in recent quarters indicates that this almost forgotten department store chain is making progress.
The turnaround plan, initiated in early 2001, has focused on reconnecting J.C. Penney with its target consumer, improving the in-store shopping experience, and centralizing functions, such as merchandising, to reduce costs and improve efficiency. Thanks to this effort, the top line has grown, operating margins have risen consistently, and inventory is under better control. We anticipate margins will show modest improvements over the next five years as J.C. Penney continues to benefit from its restructuring efforts and its additional off-mall locations.
Although J.C. Penney's recent operating margin expansion and comparable-store sales results have been impressive, we believe the retail environment remains challenging. The department store chain will have a tough time keeping its customers from shopping more at Kohl's KSS
and Target TGT. Over the past five years, these two off-mall chains have expanded while J.C. Penney has closed more stores than it has opened. Although J.C. Penney plans to increase its square footage over the next five years, it has a lot of ground to cover to catch up to its closest competitors.
In addition to competing with off-mall retailers, J.C. Penney is up against other traditional department stores and specialty retailers, which have flourished recently. Despite being a retailer for more than 100 years, J.C. Penney hasn't created an economic moat to keep competitors at bay, in our opinion. We think the battle for the moderate consumer's discretionary income will continue making it difficult for J.C. Penney to develop a sustainable competitive advantage.
Valuation
After incorporating J.C. Penney's expansion plans into our model, we are increasing our fair value estimate to $55 per share. The company plans to add 175 off-mall locations by 2009. Combining this with anticipated same-store sales growth in the low single digits, we think total revenue will grow at an annual rate of 5%, on average, over the next five years. As a result of growth in off-mall locations (which we believe are less costly to operate than mall-based stores), we expect operating margins to reach around 9.5% by 2009. Although management expects 10%-10.5% operating margins by 2009, we are not quite as optimistic. We think continued competitive pressure from Kohl's, Target, and Federated will make it challenging for J.C. Penney to gain the operating leverage necessary to hit management's margin targets. Additionally, the retailer remains vulnerable to a challenging macro environment and fickle consumers who have a growing number of choices when it comes to apparel, home fashions, and other discretionary goods. If we did assume operating margins hit 10% by 2009, our fair value estimate would be upward of $60 per share.
Risk
J.C. Penney faces a tough competitive environment. Not only is Target upgrading its apparel assortment to appeal to a more middle-income consumer, but Federated will have a national brand under the Macy's nameplate at the end of 2006, strengthening its position in the traditional department store sector. Any merchandising missteps or execution mishaps could limit J.C. Penney's ability to generate positive same-store sales growth and increase profits.
Strategy
After years of operating practices that hurt sales growth and profitability, J.C. Penney has emerged from its turnaround with more centralized decision-making to reduce operating expenses and improve efficiency. The company is focused on optimizing its merchandising mix, refining its in-store presentation, and expanding its off-mall store base.
Management & Stewardship
Myron "Mike" Ullman became chairman and CEO in December 2004. He has a strong background in retail, including group managing director of LVMH Moet Hennessy Louis Vuitton and chairman and CEO of the Macy's department store chain in the early 1990s. His total compensation in 2005 was nearly $4.8 million (with the majority of it variable and based on the company's performance), which we think is reasonable given J.C. Penney's solid performance under his leadership. While there is a long-term component to his compensation, we don't think the goals associated with it were clearly outlined in the proxy. We like that 10 of the 11 board members are independent, and we applaud the board for listening to its shareholders and putting members up for election annually, rather than every three years. With the change to elect directors on an annual basis, we have a more favorable view of J.C. Penney's corporate governance. Overall, we think it is above average.
Profile
J.C. Penney operates more than 1,000 department stores in the United States and Puerto Rico. Additionally, it sells its merchandise and services through its catalog and Web site, which hit the $1 billion sales mark in 2005. Around 40% of its merchandise is private label and includes exclusive brands such as St. John's Bay, Arizona, and the Chris Madden home collection.
Growth
Sales growth has been anemic for years because of a sizable disconnect between strategy and execution. We expect the company will generate average annual growth of around 5% over the next five years, driven by low-single-digit growth in same-store sales and 3% square footage growth.
Profitability
Returns on equity and assets have improved since the turnaround plan was initiated in early 2001. Management hopes to continue this trend by paring inventory and improving product selection.
Financial Health
The company used cash from the sale of the Eckerd drugstore chain to pay down debt and shore up its balance sheet. With operational improvements, J.C. Penney's financial health should continue to improve.
Major Markets; DWDI, LISA, SPDRs & Diamonds
Day Ending Scores
| Market | % Change | Value |
| Dow | +0.19% | 12,131.88 |
| S&P 500 | +0.25% | 1,338.42 |
| NASDAQ | +0.70% | 2,406.38 |
| . | . | . |
| DWD Indexes | . | . |
| DWDI | -0.44 | 1,049.65 |
| LISA | +0.08 | 1,036.81 |
| Warm & Fuzzy | -0.06 | 1,093.43 |
| Ambitious | +0.79 | 1,033.28 |
| AEFKY | 0.40 | 1,014.12 |
| . | . | . |
| Benchmark Indicies | . | . |
| Diamonds DIA | +0.20% | 1,037.18 |
| Spiders SPY | +0.25% | 1,054.08 |
| Personal Portfolio - Taxable | +0.06 |
| Personal Portfolio - Retirement | +0.47 |
| Skip's List | +0.32 |
Daily recap for the 10 Stocks that make up the Dollar Wise Decisions Index (DWDI)
| Stock | % Change | Value |
| Anheuser-Busch | -0.68 | 99.62 |
| Biomet | -1.71 | 119.18 |
| Fastenal | 0.68 | 97.06 |
| Home Depot | -0.66 | 101.22 |
| Johnson&Johnson | -0.53 | 103.10 |
| Medtronic | -0.12 | 104.93 |
| Microsoft | 0.38 | 110.09 |
| Wal-Mart | -0.32 | 95.92 |
| Washington Post | -0.14 | 103.34 |
| Wrigley | -1.03 | 115.18 |
Daily recap for the 10 Stocks that make up The LISA Portfolio
| Stock | % Change | Value |
| 3M | 0.39 | 108.80 |
| Coca-Cola | -0.13 | 105.50 |
| Daimler-Chrysler AG | 0.36 | 118.52 |
| Home Depot | -0.66 | 101.22 |
| Humana | 3.44 | 82.19 |
| Johnson & Johnson | -0.53 | 103.10 |
| Lowe's Companies | -0.58 | 102.36 |
| Target | -0.31 | 105.34 |
| Toyota Motor ADR | -0.77 | 112.96 |
| Worthington Industries | 0.29 | 96.81 |
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11:46 PM
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