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

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ValuationsAfter an analyst finishes analyzing the industry, accounting policies, andfinancials, the valuation of a company becomes a simple task. One becomes anexpert within the field and can use several valuation methods to derive the shareprice of a company. Once these valuations are calculated and weighted byaccuracy, one can determine if the firm is overvalued, fairly valued, orundervalued.Method of comparables ratios are first ran as quick screening methods tovaluate share price to the industry average. These different valuation ratios for J.C. Penney consistently derived that our market share price was overvalued.There was a wide range or prices from the dividend yield ratio of $14.40 to thetrailing price ratio of $82.76. This wide gap further proved that these methodsare very inaccurate and should not be used alone to value the firm.Our final estimates are based on intrinsic valuations. The discountdividend model is given little weight because of it inaccuracy. J. C. Penney’s lowpaying dividends drive its share price to $16.06. Another inaccurate model isfree cash flows, which weighs the total present value of free cash flows and theperpetuity equally. This model priced shares at $36.70. Next is the residualincome model. This model is more reliable because most of the value comesfrom forecasted earnings. This model valued shares at $27.33. The long-runreturn on equity residual income model is based off the same theory except itonly uses a perpetuity. It is very accurate, though, because it links the cost ofequity, long-run return on equity, and long-run growth on equity. This modelvalued shares at $15.33. The abnormal earnings growth model is related to theresidual income model because of their link in valuations. We were able toachieve a relative price to the residual income of $17.40. Overall, the valuationmodels further proves that J. C. Penney is extremely overvalued.7
Business & Industry AnalysisCompany OverviewJ. C. Penney Company, Inc. (JCP) is one of America’s leading departmentstore retailers. In 1902, James Cash Penney opened the first J. C. Penneydepartment store, originally named The Golden Rule, in the small mining town ofKemmerer, Wyoming. Since then, J. C. Penney has become one of the largestretailers in the department and discount segment of the retail industry with 1033stores in 49 states and Puerto Rico. In addition, J. C. Penney operates “one ofthe largest apparel and home furnishing sites on the Internet, jcp.com, and thenation’s largest general merchandise catalog business” (www.jcpenney.net).Today, the J. C. Penney headquarters is located in Plano, Texas.J. C. Penney sells merchandise and services to consumers through itsdepartment stores, catalogs, and internet channels. “Through these integratedchannels, J. C. Penney offers a wide array of national, private and exclusivebrands which reflect the Company's commitment to providing customers withstyle and quality at a smart price” (www.jcpenney.net). Some of themerchandise sold by J. C. Penney includes family apparel, jewelry, shoes,accessories, and home furnishings. Some of the services provided by J. C.Penney include salon, optical, portrait photography, and custom decorating.There are over 10,000 companies in the department and discountsegment of the retail industry; however, J. C. Penney’s major competitors includeKohl’s (KSS), Dillard’s (DDS), Stage Stores, Inc. (SSI), and Stein Mart (SMRT). J.C. Penney has a market cap of $18.51 billion. With a market cap of $24.44billion, Kohl’s is the only competitor in this group that surpasses J. C. Penney inthis area. Nevertheless, over the last five years, J. C. Penney’s net sales havesurpassed that of all its main competitors, including Kohl’s. Furthermore, J. C.Penney’s stock performance has vastly exceeded the S&P 500 and all the stocks8
Page 1 and 2: J. C. Penney Company, Inc. Equity V
Page 5 and 6: Industry AnalysisIn 1902, James Cas
Page 7: Financial Analysis, Forecast Financ
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 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
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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
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Penney’s inventory turnover is in
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ConclusionAnalysis through liquidit
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operating efficiency because the fi
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Return on AssetsReturn on Assets0.1
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Capital Structure AnalysisWhen look
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however, in 2006, J. C. Penney show
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Sustainable Growth RateSustainable
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average of only years 2005 and 2006
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(reported in millions)Annual Income
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We then began to look at the equity
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Common Size Balance Sheet 2002 2003
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(numbers in millions)Statement of C
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ConclusionOverall, it appears that
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Inc. We set these averages equal to
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Price to BookPPS BPS P/B IndustryAv
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Price Earnings GrowthPPS EPS PEG In
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y J. C. Penney’s EBITDA. Then we
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Regression Analysis3 Month Rate 72
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Intrinsic ValuationsIntrinsic valua
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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
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Residual Income Model WACC(AT) 0.07
Page 150 and 151:
Z-Score AnalysisZ-Score=1.21.43.320
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