Analysis,

JC Penny ($JCP) Analysis Ahead of Q4 Earnings

JC Penney ($JCP) is set to report its fourth-quarter financial results at 7:30 ET on Friday (2/26). Shares are rallying 9.29% to $8.41 on Thursday afternoon (3:30 pm 2/25) as analysts are anticipating Q4 earnings to increase from a year ago.

Wall Street is anticipating JC Penney ($JCP) to announce earnings of $ 0.23 per share and revenue of $ 3.99 Billion for the quarter.

What to look for?

Investors and analysts will be paying attention to several key factors during the earnings call tomorrow. JC Penney ($JCP) has undergone several strategic endeavors such as deeper penetration of private brands, focus on omni-channel capabilities, and expansion of Sephora stores. Tomorrow’s report will reveal exactly how effective these strategic changes have been. CEO of JC Penney, Marvin R. Ellison said in a recent press release: “Despite unprecedented warm weather that significantly affected apparel sales across the Company, our focus on private brands, enhanced Omni channel execution and compelling gift giving selection resulted in strong holiday sales.

However, the competitive retail landscape and JC Penney’s ($JCP) high debt level remain a drag on performance. By the end of its previous reported quarter, the corporation has more $ 5 billion in debt and has been incurring nearly $ 400 million in annual interest expense recently. Investors should pay close attention to the amount of free cash flow JC Penney ($JCP) generated during the fourth quarter. If JC Penney ($JCP) did not turn cash flow positive in  2015, they will not be able to reduce its debt and interest its expenses will continue to drag on its performance.

In addition to future guidance, we will also be looking for information about the company’s recent return to the appliance market. The U.S. appliance market has been hot recently, and J.C. Penney is well-positioned to succeed due to its female-heavy customer base. If this market test goes well, J.C. Penney ($JCP) will probably roll it out more broadly, which should provide a nice sales boost.

Fundamental Analysis

Let’s take a look at how JC Penney’s ($TGT) financial ratios compare against the other major players in the big retail sector. We populated the SprinkleBit analyzer with JC Penney’s ($JCP) main competitors, Macy’s ($M), Nordstrom ($JWN), Sears ($SHLD), and Kohl’s ($KSS). For this analysis, we used EBITDA multiples, revenue multiples, market cap to revenue, market cap to total assets JC Penney ($JCP) measures up against it peers.

By running the fundamental measures in comparison to the competition, we received an implied share price of $ 5.68. With the current trading price of $ 8.34 (EOD 2/25), JC Penney ($JCP) is overvalued by 31.87%.

 

Screen Shot 2016-02-25 at 1.19.29 PM

 

Technical Analysis

We have also analyzed the technicals on the daily chart in order to see where the stock price could potentially move to.

With an entry price of $8.36 and a reported loss on earnings, the stock has the potential to fall to $ 7.45 for a 10.89% loss.

With an entry price of $8.36 and a reported beat on earnings, the stock has the potential to rise to $ 7.45 for a 8.55% gain.

The risk/reward ratio for this trade is 0.81.

 

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