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

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discount rates in respect to pensions. Not only does the company show theserates, but they also go into detail on pension contributions and benefits in themanager’s discussion and analysis section, as well as lengthy explanations in theappendices.Another example of the company’s high level of disclosure is the operatingand capital leases. J.C. Penney does an excellent job of disclosing the remainingobligations of both types of leases. They are straightforward with the discountrates of these leases, which takes the guesswork out of estimating. Thefollowing shows the interest rates found within the most recent J. C. Penney 10-K annual report.Capital Leases 6.0 %Operating Leases 7.9 %Because this information is disclosed, backing into an interest rate forfuture forecasts of the J. C. Penny is not required. The company also providesthe present value of all future lease payments for the next 20 years, according tothe 2006 10-K. Not only does this show that the company has no significantdistortions, it also shows the breadth and depth of the financial statements.While analyzing the sales and expense ratios, one can agree that the J. C.Penney Company is the most consistent in its accounting and reporting practices.There were no relevant of significant errors in the ratio analysis to lead us tobelieve there were any problems. It should be noted, however, analysts mustmaintain a slight amount of skepticism when valuing the firm using companyfinancial statements.Coming Undone (Undo Accounting Distortions)After careful consideration and extensive research, we as a group have69
concluded that there are no accounting distortions that need to be “undone.”Once again, J.C. Penney is a very transparent business when compared to all ofthe retail competitors in this specific industry. Re-estimation of leaseagreements was not necessary because all needed information was providedwithin the footnotes and discussions relating to the financial statements. Whenwe compare the interest payments of all capital leases to the sum of alloperating lease payments, you can see the insignificance of operating leases.Interest pmts onLTD and capitalLeasesOperatingLeasesTotal 2007 2008 2009 2010 2011After5 yrs$5822 $253 $222 $218 $198 $178 $4753$1948 $213 $197 $170 $137 $112 $1119Above, the chart shows exactly this, that the operating leases that are on thefinancials are peanuts compared to the sales of J.C. Penney.70
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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
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 68 and 69: Below is a chart of all expense man
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
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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
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Residual Income Model WACC(AT) 0.07
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Z-Score AnalysisZ-Score=1.21.43.320
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