TV

Lea Jakobiak
What do Google Glass, Titan Aerospace and Texas have in common? Tech expert, Stuart Miles, has the answer.
Article / 16 August 2012 at 5:09 GMT

JCP: Is Ron Johnson’s ‘Apple halo’ offsetting terrible results?

Sverrir Sverrisson Sverrir Sverrisson
Partner - Senior Portfolio Manager / PP Capital Asset Management
Denmark

JC Penney CEO Ron Johnson has an Apple halo

 JC Penney (NSYE:JCP) reported its second-quarter results last week. In short, they were terrible!  I guess everyone was prepared for poor sales and continued losses but the final results were beyond Wall Street’s wildest nightmares. Still the stock ended the week up, and has been cruising around USD 22.5 to 23 per share. The company delivered a loss of 37 cents per share, compared to a 7 cent gain last year, and a decline in sales by 22.6 percent.  At the same time analysts expected a loss of 24 cents and 5 percent better top line performance.

Despite these awful results, CEO Ron Johnson’s presentation made investors feel good, resulting in a 5.9 percent price impact after the announcement. The way he did it was to talk about the future potential - the new ‘hip’ stores with wider isles, lounge areas, WiFi and self-checkouts that will make JCP the favorite place to shop at everyday lower prices. Johnson made substantial use of the "halo effect" left over from his days at Apple, where he was instrumental in creating the chic Apple stores. 

Seeing a stock being traded upwards after such a poor quarterly performance is rare, and signals that investors actually believe in Ron and his strategy. I personally didn’t expect such backing from the market, I expected the stock to be hammered.

However, JCP’s management did admitt several mistakes being made in the first six months of the year. The key mistake was the new pricing strategy, which is simply too confusing for customers. JCP has discontinued most marketing initiatives and changing its pricing strategy, AGAIN. Now JCP will offer two prices, everyday low price and clearance, down from three pricing segments previously.

Admitting you did something wrong is phase one. Phase two is to correct your mistakes. That is exactly what has been initiated from the 1st of August with a simplified pricing model. Ron himself is going to oversee the marketing efforts, to make sure new initiatives are promoted in the most effective way and according to the CEO, the first two weeks of August look promising.

How is it valued at this point?

With two consecutive quarters of terrible results, the stock price has dropped roughly 34 percent. Still the stock is a bit pricey in the market, trading at 69 times FY1 earnings, but if Ron can turn the ship around this valuation measure is meaningless, as earnings should explode. For the past month JCP has gained 14.8 percent, raising the company’s market value above USD 5 bn again. At the same time as the stock price has been gaining value, analysts have been revising its target price downwards by 5 percent. 

JCP vs. KSS, M, GPS & JWN

However, the growth potential is definitely there and therefore JC Penney comes at a higher price than its peers. The stock is surely overpriced based on most recent performance and its peers, as current valuation is purely built on the expectation of partial future success and turnaround.

How to trade this?

As with most other stocks, there are two straight forward ways to trade this one, short or long. The current market price, and market reaction after the earnings announcement, signals that the market believes in Ron’s plan. You can therefore say that the plan’s success is partly priced in already. Therefore, should you not believe in the new strategy, this stock looks as a very attractive short candidate as the market has continued to support the market price despite poor results. Should the plan fail entirely you could see a significant drop in the stock.

On the other hand, you might believe in the new strategy and take the ‘long’ position. I have previously outlined the potential benefits of the new strategy and how it is meant to create value. JCP’s management has stressed that this is no short term fix they are applying; this is a longer term makeover that needs time to materialize in full. If the company manages this turnaround properly there can be a significant upside to this stock.

The question whether Ron Johnson can successfully change the way people shop is unlikely to be fully answered this year. However, the second half of this year will be interesting to follow, as it will determine whether JCP manages to attract traffic to its stores again with a better in-store experience and a simple everyday lower price. But once again things are likely to get worse at JCP before they get better.

Disclaimer

The Saxo Bank Group provides an execution-only service and all information provided on Tradingfloor.com is solely for general information. When trading through Tradingfloor.com your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. Tradingfloor.com does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. Saxo Bank Group will not be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available as part of the Tradingfloor.com or as a result of the use of the Tradingfloor.com. Any information which could be construed as investment research has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such should be considered as a marketing communication. Furthermore it is not subject to any prohibition on dealing ahead of the dissemination of investment research. Please read our disclaimers:
- Notification on Non-Independent Investment Research
- Full disclaimer

Show latest activity
Dismiss
Sorry, there was a problem communicating with the TradingFloor.com servers. We are working hard to solve this. Please try again later.
Oops! There was a problem communicating with the OpenAPI Portfolio service.
Oops! There was a problem communicating with the OpenAPI History service.
Oops! There was a problem communicating with the OpenAPI Reference service.
Oops! There was a problem communicating with the OpenAPI Root service.
Oops! There was a problem communicating with the OpenAPI Trading service.
Sorry, there was a problem communicating with the Financial Calender servers. We are working hard to solve this. Please try again later.
Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail