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

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Qualitative Analysis of DisclosureThe quality of disclosure relating to the footnotes and discussion shouldbe the best the company can offer to the public without giving competitivesecrets away. It is important for analyst to believe they are receiving the bestinformation they can so that these people have confidence in the company’sdirection and guidance. Having a confidence in a company form theshareholders helps to shed positive light on future projects with eager skepticismrather than suspicion. Assurance of these statements is achieved by how wellthe company speaks about what is happening in the financial statements.PensionsJ. C. Penney does a very good job in relaying information of currenthappenings regarding new brands and product lines as well as financialpositioning and reasoning. One example of how the company strives to be astransparent as is the manner in which J. C. Penney shares information onpension plans. This particular subject is one of interest to the investingcommunity because this is an area that companies have the flexibility to distortfinancial statements and mislead analysts’ beliefs of their financial positions.J. C. Penney tries very hard to give all the information possible to create a clearpicture of where the numbers on the financials come from. Not only is therediscussion of pension plan benefits and contributions in the manager’s discussionand analysis section the 2006 10-K, but the company also provides a verydetailed section in the appendices of how exactly the number materialize.Within all eight pages of discussion and proven numbers, J. C. Penneygoes into detail on issues such as who is allowed to receive benefits, primary andsupplemental plans, expenses of such plans, how they are funded, and theactual discount rates of all plans. Unlike some companies in the industry, J. C.Penney discloses the discount rates of the plans, saving analysts the trouble of51
acking into them through crunching the numbers. Overall, the level ofdisclosure in respect to pensions is impressive in relation to industry competitors.Sales BreakdownAnother manner in which the quality of the supplemental information ofthe financial statements is helpful is the way the company breaks down thepercentages of sales of the different departments in the stores. On the followingpage is a chart extracted from the J. C. Penny 2006 10-K.Retail Sales MixThe following percentages represent the mix of consolidated netretail sales:2004 2005 2006Women’s apparel 23% 22% 22%Home 21% 22% 21%Men’s apparel and accessories 20% 20% 20%Children’s apparel 11% 11% 11%Women’s accessories 9% 10% 10%Family footwear 6% 6% 6%Fine jewelry 5% 5% 5%Services and other 5% 4% 5%This example of information is important because it shows a breakdown ofthe sales of each department. As you look at the table, you can see why J. C.Penney has focus on women when it comes to new brands and product lines,such as the new lingerie brand Ambrielle. Information such as this helps peopleunderstand the direction in which the company is heading, and why J. C. Penneyhas chosen to move in that direction. In the case of the J. C. Penney Company,52
Page 1 and 2: J. C. Penney Company, Inc. Equity V
Page 5 and 6: Industry AnalysisIn 1902, James Cas
Page 7 and 8: Financial Analysis, Forecast Financ
Page 9 and 10: Business & Industry AnalysisCompany
Page 11 and 12: Industry OverviewThe retail industr
Page 13 and 14: Five Forces ModelThe Five Forces Mo
Page 15 and 16: ConcentrationThe level of concentra
Page 17 and 18: capable of offering lower prices th
Page 19 and 20: If a firm wishes to shut down, it m
Page 21 and 22: Legal BarriersMany industries have
Page 24 and 25: These costs include issues such as
Page 26 and 27: Bargaining Power of SuppliersThe de
Page 28 and 29: The relative bargaining power of th
Page 30 and 31: Competitive StrategiesIn order to a
Page 32 and 33: Department stores have to focus on
Page 34 and 35: The Big PicturePlayers in this indu
Page 36 and 37: Lower Input CostsJ. C. Penney is at
Page 38 and 39: in the last five years. This trend
Page 40 and 41: convenient for different consumers
Page 42 and 43: transactions have been improperly s
Page 44 and 45: Penney does state in its annual rep
Page 46 and 47: Operating and Capital LeasesOperati
Page 48 and 49: Potential Accounting FlexibilityA f
Page 50 and 51: truly are. J. C. Penney, however, h
Page 54 and 55: we can see why targeting the strong
Page 56 and 57: manipulation diagnostics for J. C.
Page 58 and 59: Net Sales/Net Accounts ReceivableNe
Page 60 and 61: Net Sales/Unearned Revenue1200Net S
Page 62 and 63: 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 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 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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J. C. Penney Company, Inc. Equity Valuation and Analysis As of ...

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