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

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Capital Structure AnalysisWhen looking at capital structure ratios, the emphasis is on ability of acompany to meet debt obligations in relation to owner’s equity. The debt toequity, times interest earned, and debt service margin ratios explain where acompany stands in this respect. The following analysis compares the J. C.Penney Company to the rest of the industry.Debt to EquityDebt to Equity Ratio4.54.03.53.02.52.01.5JCPKSSDDSSSISMRT1.00.50.02002 2003 2004 2005 2006YearThe debt to equity ratio shows how much debt a company has comparedto equity. For every dollar in equity, this ratio shows how much debt a companyhas. The industry shows a fair average of debt to equity between .5 and 1.75. J.C. Penney and Dillard’s have high debt to equity compared to Stein Mart, Kohl’s,and Stage Stores widely ranging roughly from 1.75 all the way to 4.2. TheDillard’s Company is having problems over the years dealing with restructuring,so this company has been all over the charts on most comparisons. Therefore,J. C. Penney compared to the industry has an unfavorable record of debt to85
equity. As we follow the trend through the years, you can see the impact of thesale of Eckerd Pharmacy in 2004. Debt dropped, bringing the ratio down, butdue to a push in change in brand lines and differentiation, the ratio rises again.Times Interest EarnedTimes Interest Earned55453525155-5-15JCPKSSDDSSSISMRT-25-35-45-552002 2003 2004 2005 2006YearTime interest earned ratio tells that for every dollar in interest expense,the company has this amount in NIBIT to spend on interest and taxes. Theindustry numbers run around 2-15 times interest payable to NIBIT. In 2004,Stein Mart’s times interest earned suddenly shot up because it reported netinterest income of $332,000 compared to interest expense of $1.7 million for2003. As a result of increased sales, decreased inventories, and ongoingexpense control, Stein Mart has not borrowed on its revolving credit agreementsince the first quarter of 2004, completely eliminating its interest expense (SteinMart 2004 10-K).J. C. Penney is unfavorable with this ratio. As we look at years 2003-2005, the company shows a negative times interest earned. This says that inthese years, the company did not earn enough to cover their interest expenses;86
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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
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Legal BarriersMany industries have
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These costs include issues such as
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Bargaining Power of SuppliersThe de
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The relative bargaining power of th
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Competitive StrategiesIn order to a
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Department stores have to focus on
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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 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 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
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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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