Tuesday, March 5, 2013

J.C. Penney Keeps Falling, Down 9%

Andrew Gombert/European Pressphoto AgencyBad signs

Another day, another plunge in J.C. Penney‘s (JCP) stock price. Shares are down just over 9% today, meaning the stock has lost a whopping 28% in the past week.

No doubt a lot of today’s pessimism is due to news that Vornado Realty Trust (VNO) reportedly sold nearly half its stake — 10 million shares — in the retailer.

I don’t need to point out that it’s a really not a good sign when your (formerly) second-largest investor cashes out in the midst of a sharp drop, yet Bloomberg quotes one analyst suggesting Vornado’s not done washing its hands:

�We think Vornado could be back in the market in the near- term to sell its remaining 8.6 million shares,� Lorraine Hutchinson, an analyst at Bank of America Corp. in New York, wrote in a note today. �Our work indicates that monetizing J.C. Penney�s real estate would be difficult and substantially less lucrative than the market initially thought.�

Hutchinson reiterated her underperform recommendation, the equivalent of a sell, on the Plano, Texas-based retailer�s stock, saying it will remain under pressure �due to deteriorating investor confidence� in the turnaround.

And there’s worse, courtesy of Gilford Securities analyst Bernard Sosnick, who wrote today:

CFO [Ken] Hannah says Penney has access to $3bn of capital based largely on its bank agreements. But Penney does not have the earnings to support additional interest expenses. Management undoubtedly knows there are capital limitations. Johnson acknowledged that if cash flow does not develop as had been anticipated the rollout of shops might not be accomplished in three years.

We allow for a 3% sales increase in 2013, a big recovery in the gross margin, a reduction in the expense ratio�all to arrive in a bottom-line improvement�to a loss of $0.72 per share. By 2014, we assume EPS might climb to about $1.00. A progression of this meager magnitude would not support a bullish move much beyond the current level, in our opinion. Moreover, we think the long-term prospects for JCP are problematic.

In 2000, during a desperate time for the company the stock dropped to under $11. It might happen again.

Even with today’s loss, a drop to $11 a share would mean a further 28% decline. If you thought things couldn’t get worse for Penney, think again.

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