J. C. Penney Company, Inc. Equity Valuation and Analysis As of ...

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Intrinsic ValuationsIntrinsic valuations give a better overall picture of the firm as a groupcompared to the comparable methods. The reason is that the four intrinsicmethods used to value J. C. Penney slice and dice the company, looking at manydifferent angles of valuation. The methods used were the discounted dividendmodel, the free cash flows model, residual income model, and the long run ROEresidual income model. Following is a discussion of each of the models and theirrelevance in valuing the J. C. Penney Company.Discount Dividends ModelThe discount dividends model values a firm by the value it holds for itsshareholders. Shareholders consider receiving value from a firm they invest inby the dividends they receive. Therefore, this method consists of discounting thefuture dividends back to present value to value the firm. This method is not veryreliable due to several factors. First, we must assume the profitability of acompany to go on for an indefinite period whereas in real life it could gobankrupt. In addition, dividends generally increase in a stepladder fashion. Thismeans that dividends remain at the same level for some time and then they“step” into a higher value for some time and so forth. This has a very smallvolatility measure, therefore not showing the volatility that is within the pricing ofa firm from day to day. This just shows it’s a very inaccurate way to value afirm. Following is the model in respect for J. C. Penney.113
Sensitivity AnalysisGrowth Rates0.105 0.11 0.114 0.115 0.11750.118 $25.91 $41.34 $77.77 $102.06 $587.810.12 $23.08 $34.05 $50.71 $63.20 $121.49K e 0.1361 $13.53 $16.06 $18.08 $18.71 $20.570.15 $11.36 $12.17 $12.98 $13.21 $13.850.16 $10.18 $10.71 $11.22 $11.36 $11.74Over Valued $94.24 Actual PPS (as of June 1, 2007)- $81.99To calculate the value of J. C. Penney using this valuation model, we firstlooked at our dividends. We took an average of the change in dividends, tookout some outliers, and saw a consistent increase of 11 percent about every threeyears. We believe J. C. Penney will continue to increase their dividends in thisfashion due to the consistent profitability they have had the last couple of years.We then discounted these dividends back to present value and found the sum.Once we added up the dividends for the next ten years, we used the perpetuityequation to value the firm for the indefinite amount of time past ten years. Thisis valued by using a selected dividend amount divided by cost of equity minusgrowth of dividends. We decided not to grow dividends anymore since in thepast they had kept a dividend amount for more than 3 years. Since we were soaggressive in our growth for the next ten years, we assumed they wouldmaintain the dividend amount at about a dollar for a long period of time.Therefore, we kept the 99 cents we had for the last four years. This perpetuitycame out to be $37.93 in year ten value. So we then discounted back to thepresent value of $10.59. We added the value of the firm for the next ten yearswith the value of the perpetuity and came up with the value of our company.The total value of our firm as of January 2007 came out to be $15.53 pershare. Since we are valuing our firm as of June 1, 2007, we then had to growour share price to June 1 and the new implied share price is $16.06. Thisamount is a lot smaller than the amount of J. C. Penney’s share price in themarket of $81.99. This shows that our company is overvalued by a large114
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J. C. Penney Company, Inc. Equity V
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Industry AnalysisIn 1902, James Cas
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Financial Analysis, Forecast Financ
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Business & Industry AnalysisCompany
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Industry OverviewThe retail industr
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Five Forces ModelThe Five Forces Mo
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ConcentrationThe level of concentra
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capable of offering lower prices th
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If a firm wishes to shut down, it m
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Legal BarriersMany industries have
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These costs include issues such as
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Bargaining Power of SuppliersThe de
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The relative bargaining power of th
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Competitive StrategiesIn order to a
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Department stores have to focus on
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The Big PicturePlayers in this indu
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Lower Input CostsJ. C. Penney is at
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in the last five years. This trend
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convenient for different consumers
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transactions have been improperly s
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Penney does state in its annual rep
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Operating and Capital LeasesOperati
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Potential Accounting FlexibilityA f
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truly are. J. C. Penney, however, h
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Qualitative Analysis of DisclosureT
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we can see why targeting the strong
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manipulation diagnostics for J. C.
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Net Sales/Net Accounts ReceivableNe
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Net Sales/Unearned Revenue1200Net S
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Below is a chart of sales manipulat
Page 64 and 65: As for the industry, all the compan
Page 66 and 67: Pension Expense/SG&APension Expense
Page 68 and 69: Below is a chart of all expense man
Page 70 and 71: discount rates in respect to pensio
Page 72 and 73: Financial Analysis, Forecast Financ
Page 74 and 75: paying off their short-term obligat
Page 76 and 77: ecause many firms in this segment o
Page 78 and 79: Penney’s inventory turnover is in
Page 80 and 81: ConclusionAnalysis through liquidit
Page 82 and 83: operating efficiency because the fi
Page 84 and 85: Return on AssetsReturn on Assets0.1
Page 86 and 87: Capital Structure AnalysisWhen look
Page 88 and 89: however, in 2006, J. C. Penney show
Page 90 and 91: Sustainable Growth RateSustainable
Page 92 and 93: average of only years 2005 and 2006
Page 94 and 95: (reported in millions)Annual Income
Page 96 and 97: We then began to look at the equity
Page 98 and 99: Common Size Balance Sheet 2002 2003
Page 100 and 101: (numbers in millions)Statement of C
Page 102 and 103: ConclusionOverall, it appears that
Page 104 and 105: Inc. We set these averages equal to
Page 106 and 107: Price to BookPPS BPS P/B IndustryAv
Page 108 and 109: Price Earnings GrowthPPS EPS PEG In
Page 110 and 111: y J. C. Penney’s EBITDA. Then we
Page 112 and 113: Regression Analysis3 Month Rate 72
Page 116 and 117: amount in the eye’s of shareholde
Page 118 and 119: This particular stock price in our
Page 120 and 121: esidual income or converge. Future
Page 122 and 123: To find our long run return on equi
Page 124 and 125: Sensitivity AnalysisGrowth Rates0 -
Page 126 and 127: for this large difference between s
Page 128 and 129: Analyst RecommendationAfter careful
Page 130 and 131: AppendixLiquidity RatiosCurrent rat
Page 132 and 133: Capital Structure RatioDebt to equi
Page 134 and 135: SUMMARY OUTPUT3 Month Regression72
Page 136 and 137: SUMMARY OUTPUT6 Month Regression72
Page 138 and 139: SUMMARY OUTPUT2 Year Regression72 M
Page 140 and 141: SUMMARY OUTPUT5 Year Regression72 M
Page 142 and 143: SUMMARY OUTPUT10 Year Regression72
Page 144 and 145: Cost of Equity 0.1361Estimated Pric
Page 146 and 147: Discount Dividends Model0 1 2 3 4 5
Page 148 and 149: Residual Income Model WACC(AT) 0.07
Page 150 and 151: Z-Score AnalysisZ-Score=1.21.43.320
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