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

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Financial Analysis, Forecast Financials, andCost of Capital EstimationFinancial AnalysisIn an effort to accurately evaluate the overall financial health andprofitability of a firm, analysts have developed a series of ratios to breakdown afirm’s financial statements into numbers that can be easily compared to those ofits competitors within its industry. The ratios most commonly used whenevaluating a company’s overall financial health and profitability are divided intothree categories: liquidity, profitability, and capital structure. By comparing theratios of companies within the same industry, analysts can draw conclusionsabout the performance of a single firm in relation to its competitors. Simply put,this section of the report will help determine how well J. C. Penney stacks up tothe competition.Liquidity AnalysisLiquidity ratios are used to provide information about a firm’s ability tomeet its short-term financial obligations (www.netmba.com). Liquidity ratioshelp lenders evaluate the credit risk associated with prospective borrowers.Lenders generally prefer higher liquidity ratios because it demonstrates that afirm has adequate resources to pay off its short-term financial obligations shouldthe need arise. Common liquidity ratios include the current ratio, quick ratio,inventory turnover, receivables turnover, and working capital turnover. Thefollowing section exams these ratios.71
Current RatioCurrent Ratio4.03.53.02.52.01.5JCPKSSDDSSSISMRT1.00.50.02002 2003 2004 2005 2006YearThe current ratio is the relationship between a company’s current assets(cash, cash equivalents, short-term investments, receivables, and inventory) andthe current or short-term liabilities (short-term debt and payables). The mainfunction of this ratio is to determine a company’s ability to pay back its shorttermliabilities in a hurry, should the need arise. The higher the ratio the morelikely a company will be able to pay off its obligations. For instance, a companywith a ratio of 1:1 has $1 of current assets for every $1 of short-term liabilities,which means should there be able to pay off short-term liabilities immediately;however, this just covers the basic need. A better turnover would be involvemore assets or less liabilities.J. C. Penney typically maintains a current ratio of 2:1, which means that J.C. Penney is unlikely to default on any of its short-term liabilities. Furthermore,as you can see from the graph, some retailers have held current ratios as high as3.5:1, but most companies within this segment have converged on 2:1. Thismeans that companies in this segment of the retail industry are capable of72
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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
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 70 and 71: discount rates in respect to pensio
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
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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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J. C. Penney Company, Inc. Equity Valuation and Analysis As of ...

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