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

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Analyst RecommendationAfter careful consideration and research of the J.C. Penny Company,including an industry analysis, accounting analysis, financial analysis, forecastingand future financial statements, and valuation model conclusions, we considerthe firm to be highly overvalued and should be set to sell.Assumptions used to calculate all relevant information were takenconsidering past financials of the company as well as four other competitors,Stein Mart, Kohl’s, Dillard’s, and Stage Stores, Inc. This department retailindustry is very highly concentrated with relevant competition set as those whotake advantage of similar key success factors such as economies of scale andscope, supplier relationships, and brand creation within different stores.Looking at accounting ratios, J. C. Penney held the standard of theindustry and even surpassed many competitors in respect to sales beingsupported by business happenings. There were no problems found or anyindication that financial statements have been manipulated to reflect betternumbers in the last five years of the business. Appropriate values were reflectedin the years where J. C. Penney sold unprofitable assets, and again reveal theturnaround after the fact. If anything, disclosure has only improved year byyear, making the company fairly easy to value. As for financial ratios, wedeemed that J.C. Penney overall had a superior performance over the market.When forecasting the financial statements of the company, not only weretrends of the past five years of the company used, but also that of thecompetitors. We feel the growth percentage used was fairly chosen, if not alittle conservative in estimation, and gives an accurate look into the future.Even though no real problems were found and the company seems to flyabove the competition on many aspects, the valuation models used based off ofthese future forecasts show that the company is overvalued. Even after deeming127
the discount dividend model irrelevant to our company, all other modelsconsistently showed an overall picture of overvaluations.After consideration of all aspects, we recommend that the stock of J. C.Penney be set to sell. Throughout this analysis, company stock prices werecompared to the price at June 1, 2007, $81.99. We feel that our valuations arecorrect seeing that the price on June 22, 2007 is at $72.98. The market hasobviously realized what we have found, that the company is overvalued. Wealso see an opportunity to buy put options on the stock. If we are on target,buying at put option for next month would give the market a little more time tocontinue to realize this, giving investors the chance to cash in on theovervaluation.128
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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
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As for the industry, all the compan
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Pension Expense/SG&APension Expense
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Below is a chart of all expense man
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discount rates in respect to pensio
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Financial Analysis, Forecast Financ
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paying off their short-term obligat
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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 114 and 115: Intrinsic ValuationsIntrinsic valua
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 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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J. C. Penney Company, Inc. Equity Valuation and Analysis As of ...

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