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There's Still a Bull Case for J.C. Penney

Andrew Marder
October 2, 2013

With J.C Penney's (NYSE: JCP) recent decline, and then the more recent decline, and then the even more recent decline, a lot of the focus has been on why the company isn't going to do well anytime soon, if it ever does. I've focused on that myself. But that overlooks at least half of the advice that Warren Buffett gave us: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

So let's take a look at both parts of the investment plan. Is J.C. Penney a wonderful company and is it selling at a fair price?

Company quality
There's more to being a wonderful company than having a huge following, selling a ton of stuff, or having a massive competitive moat. Sure, those things help, but they're just pieces of an overall business. For instance, one of J.C. Penney's biggest assets is the value of its literal assets. The company owns $5.8 billion in property and equipment according to its most recent quarterly SEC filing.

That's not just cash waiting to happen, though. The company recently secured a $2.25 billion term loan using some of those real estate assets in addition to "substantially all other assets of JCP and the guarantors." Still, the company has real estate.

It also has some cash on hand. Again, at last filing, that amounted to $1.5 billion in cash and equivalents, which was a $714 million increase from the end of the previous quarter. That jump was driven by a $2.2 billion share issuance, which means that the company only generated cash due to the fact that it diluted the value of its shares.

That's been the driving force behind most of the interest in J.C. Penney, regardless of which side of the fence you're on. Either the company is dropping like a stone so you should get out, or it's dropping like a stone so now's the time to buy. Either way, the company's shortfalls have pushed the stock down 64% over the last 12 months. So far, investors haven't hit the perfect time to buy.

The long term
Even if the company falls, that doesn't mean that now is a bad time to buy. While investors should always be looking to sell high and buy low, buying at "not the lowest low" doesn't mean that you're failing. Maybe J.C. Penney is priced right for the business that it now runs and the future that it has.

The company trades at a price-to-sales ratio of 0.16. That's cheap. A company like Nordstrom (NYSE: JWN) can command a 0.88 price-to-sales ratio because it's growing. Nordstrom increased comparable-store sales by 4.4% last quarter over the previous year -- J.C. Penney's comparable sales dropped 11.9% in its last quarter.

The old adage seems to be true in terms of what you get right now. Buying Nordstrom gives you access to a growing business with a strong leadership team. Buying J.C. Penney gets you a whole mess of failures. Looking back to our original question, though, we don't care if J.C. Penney has been bad -- we want to know if it will be good. Maybe buying cheap is like buying saffron seed -- not much now but generates go