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

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Below is a chart of all expense manipulation diagnostics used to create the abovegraphs comparing J. C. Penney to industry competitors.Expense Manipulation DiagnosticsJCP 2002 2003 2004 2005 2006CFFO/OI 1.3106 1.0278 0.8589 0.8478 0.6529CFFO/NOA 0.2711 0.2310 0.3097 0.3567 0.3015Asset Turnover 1.8104 0.9719 1.3041 1.5071 1.5705Total Accruals/Change in Sales 90.431 -1.1657 27.111 48.862 16.620Pension Expense/SG&A 0.0027 0.0222 0.0140 0.0118 0.0016Other Employment Expenses/SG&A 0.0549 0.0809 0.0876 0.0900 0.0945KKSCFFO/OI 0.6140 0.7372 0.7662 0.6225 1.7078CFFO/NOA 0.1995 0.1840 0.1905 0.1523 0.4423Asset Turnover 1.4441 1.5349 1.4663 1.4642 1.7192Total Accruals/Change in Sales 0.3160 0.4357 0.3786 0.5335 -0.517Pension Expense/SG&A n/a n/a n/a n/a n/aOther Employment Expenses/SG&A 0.0309 0.0309 0.0206 0.0244 0.0330DDSCFFO/OI 0.7998 1.7945 1.6152 1.2179 1.1092CFFO/NOA 0.1059 0.1351 0.1741 0.1168 0.1141Asset Turnover 1.1850 1.1852 1.3227 1.3703 1.4119Total Accruals/Change in Sales -30.970 -22.966 -99.123 227.42 95.900Pension Expense/SG&A 0.6183 0.5679 0.0045 0.0061 0.0050Other Employment Expenses/SG&A 0.0236 0.0255 0.0212 0.0269 0.0265SSICFFO/OI 0.3963 1.1171 0.3682 0.2708 0.1216CFFO/NOA 0.7738 1.6358 0.6239 0.4342 0.1978Asset Turnover 1.6434 1.4747 1.8105 1.8370 1.8790Total Accruals/Change in Sales -0.1053 -2.6626 -0.2982 -0.4999 0.0006Pension Expense/SG&A 0.0012 0.0016 0.0002 0.0002 0.0006Other Employment Expenses/SG&A 0.0232 0.0345 0.0192 0.0603 0.0561SMRTCFFO/OI 0.9650 3.7645 1.8966 0.9717 0.5234CFFO/NOA 0.4020 0.3882 1.6324 0.8766 0.2677Asset Turnover 3.4339 3.4487 3.0755 2.8501 3.1254Total Accruals/Change in Sales -0.1585 0.5201 -0.7489 -1.1577 0.3484Pension Expense/SG&A 0.0049 0.0030 0.0028 0.0023 0.0036Other Employment Expenses/SG&A 0.0313 0.0384 0.0420 0.0804 0.066467
ConclusionSome firms within the department and discount segment of the retailindustry demonstrate some questionable accounting practices when compared totheir peers within the industry. However, such inconsistencies may be explainedby changes in accounting policies or unusually good (bad) sales activity.Nonetheless, any inconsistency needs to be thoroughly investigated foraccounting abuse.Of the firms evaluated by these sales and expense manipulationdiagnostics, J. C. Penney appears to be the most consistent in its accounting andreporting practices. Although nothing unusual seems to be jumping off thepage, assuming J. C. Penney’s financial statements are complete and correct isfoolish. Analysts, regulators, and investors, alike, must have a healthy amountof skepticism when using the financial statements of this firm, or any firm, tomake financial decisions.Potential “Red Flags”Accounting distortions can be found by examining the financial statementsand the information held there within using ratio analysis over a period ofcomparative years. In the case of this accounting analysis, we have looked overfive years of data. The discrepancies found during this analysis are viewed asred flags. These red flags could be accounting errors; however, they may be anindication of accounting manipulation and abuse.Potential red flags, in regards to the J.C. Penney Company, are limited.Even with careful analysis, we were unable to find any significant discrepanciesin reporting. In fact, the annual 10-K reports filed with the SEC have improved,making reporting and disclosures more transparent. Of all the firms we haveresearched, which include the following: Stage Stores, Stein Mart, Kohl’s, andDillard, the J. C. Penney Company has the highest level of disclosure and themost revealing financial statements. For example, J. C. Penney’s discloses68
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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
Page 9 and 10:
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
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 52 and 53: Qualitative Analysis of DisclosureT
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 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
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This particular stock price in our
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esidual income or converge. Future
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To find our long run return on equi
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Sensitivity AnalysisGrowth Rates0 -
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for this large difference between s
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Analyst RecommendationAfter careful
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AppendixLiquidity RatiosCurrent rat
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Capital Structure RatioDebt to equi
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SUMMARY OUTPUT3 Month Regression72
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SUMMARY OUTPUT6 Month Regression72
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SUMMARY OUTPUT2 Year Regression72 M
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SUMMARY OUTPUT5 Year Regression72 M
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SUMMARY OUTPUT10 Year Regression72
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Cost of Equity 0.1361Estimated Pric
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Discount Dividends Model0 1 2 3 4 5
Page 148 and 149:
Residual Income Model WACC(AT) 0.07
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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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