Does J.C. Penney Have Liquidation Value or Will the News Keep Getting Worse?

Times have been hard for J.C. Penney Company (NYSE: JCP  ) , even in spite of its early turnaround success.  However, when a company's stock falls significantly, one question that the Foolish investor should begin asking themselves is whether or not the company in question has any value being dead instead of alive.  To address this question with J.C. Penney, I decided to try and figure out if it is, potentially, worth something to investors that could limit (or maybe even enhance) shareholder value should they go under.

J.C. Penney's Depressing Developments
With all the bad news that has surfaced about the bleak outlook for J.C. Penney (NYSE: JCP  ) , I'm beginning to feel sorry for the company. In addition to suffering from deteriorating fundamentals, as chronicled here, the company's plan to raise capital via a massive share offering (as explained here) has been looked upon by Mr. Market as a sign of impending doom.

To be frank, the market may be right. The company's sales have plummeted over the past couple years, and its net income has swung deep into negative territory (with it's net loss this past quarter amounting to $586 million).  In juxtaposition, Macy's (NYSE: M  ) , has been performing much better, with sales rising by 17.9% over the past four years to a high of $27.7 billion.  Meanwhile, its net income has risen from $329 million in 2010 to $1.34 billion in its most recent fiscal year, an increase of 305.8%.

As a result of these developments, the company's share price has declined by more than 53% over the past four months. Just as things appear to have gotten as bad as they possibly could, more developments have arisen that added (and will likely continue to add) downward pressure to the company's share price.

One of the larger developments involved Perry Corp., a large hedge fund, selling off more than half of its holdings of J.C. Penney; this effectively decreasing the fund's ownership in the company from around 8.62% to 3.28% (see here for more details.) This news came approximately a month after Bill Ackman, the manager of the $11 billion hedge fund Pershing Square Capital Management, sold the entirety of his 18% in the company at a loss of close to $500 million.

On top of big-time investors selling shares of the company in droves, a recent press release issued by law firm Robbins Geller Rudman & Dowd LLP, which seeks to recover losses incurred by purchasers on record between Aug. 20, 2013 and Sept. 26, 2013 for false and misleading statements relating to the company's health (see here for more details.)

Some Upside in Sight?
After all of these negative catalysts, is there any upside to the J.C. Penney story? Although the company appears to be in free-fall, I believe the answer is "maybe." While the business that is J.C. Penney does not likely have much longer in this world if its sales and underlying fundamentals continue to deteriorate, there is some comforting news that bargain-buyers may find appealing. According to Fool Bill Stoller, whose work on Sears Holdings (NASDAQ: SHLD  ) can be found here, Sears may be trading at a discount to its intrinsic value because of the untapped value of its real estate assets.

In essence, the report references a 139-slide presentation that was put out by Baker Street Capital Management which states that the value of Sears's property amounts to at least $8.6 billion (while it is on the books for around $5.8 billion.) If its top locations are renovated completely, they would be worth as much as nearly $13.4 billion (compared to the company's current market capitalization of almost $6.8 billion.) Based on this analysis, Sears, a company that has also been struggling to hold its own against brick and mortar competitors and online sales, could be significantly undervalued if liquidated.

Tweaking Estimates                                                                                    If J.C. Penney were to shut its doors, let's say that its products may only be worth $0.20 on the dollar.  Add to this the likelihood that its other current assets (which consist of intangible assets and the like) would probably get even lower, possibly in the range of $0.05 on the dollar.  Furthermore, any type of bankruptcy and liquidation event would likely involve the company's cash being depleted significantly (let's say by 80% to be safe), as well as seeing most of its other assets written off completely. This would result in a liquidation value of $9.11 per share.

Foolish takeaway
According to the calculations above, someone who invests in J.C. Penney today might be able to make a small profit by buying the shares now. However, this takes into consideration some very loose assumptions that I don't believe the Foolish investor should take at face value. Rather, if you are interested in buying, I would apply a very large margin of safety to these estimates to account for the great deal of uncertainty that accompanies being a J.C. Penney shareholder.

Another option would be to acquire shares of Macy's.  Although they are relatively expensive at 14.6 times last year's earnings, the company has demonstrated a high level of margin improvement and stable revenue growth.

 

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Read/Post Comments (5) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 16, 2013, at 7:46 PM, FredBP wrote:

    I loved JC Penney when I was young. They could do quite well if they started to sell American only. That would be a concept retailers are scared to try..... What do they have to lose.............

  • Report this Comment On November 16, 2013, at 11:49 PM, Shaun2472 wrote:

    What if Macy's were to shut their doors? Equally useless (and fear mongering) exercise. What were David Tepper and a multitude of other highly successful hedge funds thinking? Listen to them or a crowd of negative "fools?"

  • Report this Comment On November 17, 2013, at 7:02 AM, assisgnmeaname wrote:

    You mention the sellers, but not the substantial buyers in the latest 13F filings...even a child knows that's a one-sided debate....also, why have a paragraph about SHLD's underlying RE value? That's a non-sequitur.

    Oddly enough though...if a person agrees with the author that JCP has a ~$9 liquidation value, the way I see it is you buy the stock here and look at it as having a free call option for a six months or so.

  • Report this Comment On April 21, 2014, at 1:45 PM, rpace1906 wrote:

    I have a very basic understanding of how liquidation services work, but had no idea that companies have liquidation value. I guess that makes sense because some businesses are worth more than others, thus making their liquidation value higher or lower. You never really think about how much actually goes into this kind of stuff until you look into it yourself.

    http://insolvencysolutions.com.au

  • Report this Comment On May 22, 2014, at 12:56 PM, emarshall12 wrote:

    Thank you for the post. It is interesting how the business has evolved for JC Penney. Is there a chance that JC Penney will go bankrupt or be bought out by another company if it completely tanks?

    Emily Marshall | http://insolvencysolutions.com.au/

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