Across the entire curve, credit spreads on JCPenney are exploding. The curve is inverted with the market indicating an almost 50% chance of default within the next 2 years (specifically in 2014 as opposed to pre-2013 Xmas). The stock price is collapsing further (though we suspect a gaggle of analysts calls to catch the accelerating knife - just as we saw last time). At $6.30, this is the lowest stock price since March 1981, on the back of yet another downgrade (this time with a $1 target) by none other than the same Mary-Ross Gilbert who proclaimed the most recent quarter a success and suggested buying the debt in just August.
The CDS market is not painting a pretty picture for the future of JCP - 2Y CDS implies around a 50% probability of default (based on market standard recoveries - which we feel will be lower gven Goldman's 1st lien...)
and the stock is imploding even more...
Though there's always next week... this analyst hopes so (from Sept 25th):
— Hedgeye (@Hedgeye) September 25, 2013
We’re buyers of J.C. Penney (JCP) on today’s sell-off. Let’s be clear about what kind of call this is, because it’s definitely not for the faint of heart.
We still know nothing about the long-term strategy or upcoming management transition, and are still living with the balance sheet baggage from the past two years.
This is a company with no square footage growth, where the average consumer could care less if it exists or not. (Sounds great, huh?). But everything has a price. And at $10, way too much credence is being given to the ‘terminal’ call.
We can say a lot of bad things about JCP, but we definitely don’t think it is terminal and our recent work suggests that much of the business lost is definitely recoverable.
As it relates to liquidity, we think that the only reason why the company would act now is to ensure that it has the best pool of CEO candidates possible (questions around liquidity would otherwise weed out the best candidates).
Here's another analyst from August:
"That's a sequential improvement from the down 16.6 percent in the first quarter. So I would say the numbers are closely in line," Mary Ross Gilbert, managing director at Imperial Capital, told CNBC shortly after Penney released its results. "We were [also] seeing a sequential improvement throughout the quarter. Comp sales were improving throughout the quarter."
"The debt, we think, is a great way to play the bet on J.C. Penney's turnaround," Gilbert said in a "Squawk Box" interview.
but then today...
Imperial Capital’s Mary Ross-Gilbert offers her answer by lowering her price target on JC Penney’s stock to $1, while cutting her rating on JC Penney’s bonds maturing in 2015-2018 to Sell. She explains why:
While we think JCP can be “turned around,” we are becoming increasingly concerned that without a “deep-pocketed” long-term investor providing financial and “halo” support, the company may strategically file for bankruptcy protection to conserve cash while it continues to execute a turnaround in 2014 and 2015. We continue to believe in the viability and sustainability of JCP, which with support from a significant investor and/or stronger than expected financial performance, could deliver equity-type returns (assuming they trade up to the low-to-mid 80s) to investors of the longer-dated bonds while potentially protecting the downside by hedging.
We are maintaining our Underperform rating on the shares, but we are lowering our one-year price target to $1 from $5. Our new $1 price target is based on the notional “option” value of the shares, given our increasing concerns the company may engage in a financial restructuring in 2014.
Meanwhile Citi nailed it:
"The turnaround is taking longer than we anticipated, and we are concerned about a softening macro environment combined with deteriorating vendor relationships", and of course "We maintain our EPS ests. but are lowering our target price to $7, down from $11 prev., based on an EV/Sales valuation methodology using our 2015 sales estimate." And it gets worse: "Where’s The Floor? — As a supplement to our EV/Sales valuation methodology, we have conducted a basic liquidation valuation, yielding $324M total value, or $1/share."