To many investors, J.C. Penney (NYSE:JCP) stock looks like a guaranteed loser. For example, my Foolish colleague Timothy Green recently described the bull case for J.C. Penney being that it is failing more slowly than longtime rival Sears Holdings (NASDAQ:SHLD). Indeed, J.C. Penney posted weak sales and earnings results last quarter and slashed its full-year earnings-per-share forecast due to the implementation of new accounting rules.

However, while J.C. Penney's recent performance hasn't quite lived up to expectations, it's not a failing company by any means -- and it's certainly no Sears. J.C. Penney is still in the middle of a turnaround, but it's far healthier than it may appear.

Free cash flow looks better than earnings

J.C. Penney's recent guidance reduction seemed to spook investors, causing J.C. Penney stock to plunge. The midpoint of the company's new EPS guidance range is just $0.03, down from $0.15 previously. This would mark a second consecutive disappointing result. Last year, J.C. Penney posted adjusted EPS of $0.22, well below its initial guidance range of $0.40 to $0.65. In fiscal 2016, EPS came in at just $0.08.

While J.C. Penney stock has been trading for less than $3 recently -- having lost 85% of its value over the past five years -- it doesn't look cheap based on traditional P/E metrics because it's barely earning a profit.

JCP Chart

J.C. Penney stock performance, data by YCharts.

However, viewed through the lens of free cash flow, J.C. Penney stock seems like a bargain. Whereas Sears Holdings has been burning nearly $2 billion of cash annually in recent years, J.C. Penney has posted positive free cash flow for four consecutive years and is on track to generate plenty of free cash flow in 2018.

In fact, J.C. Penney's free cash flow has typically exceeded its accounting earnings in recent years, sometimes by quite a bit. Take a look:

Fiscal Year

Adjusted Net Income

Free Cash Flow

2014

($816 million)

$57 million

2015

($315 million)

$131 million

2016

$24 million

$3 million

2017

$68 million

$213 million

2018 (estimated)

$9 million

$250 million

Data source: J.C. Penney earnings reports. 2018 figures are the midpoint of current guidance.

J.C. Penney stock currently trades for just four times free cash flow. To be fair, J.C. Penney controversially includes most of its asset sale proceeds in its calculation of free cash flow, unlike many other companies. Last year, free cash flow would have been $59 million instead of $213 million with asset sale proceeds excluded.

That said, J.C. Penney expects asset sale proceeds to account for less than half of the company's projected 2018 free cash flow of $200 million to $300 million. Additionally, J.C. Penney still owns hundreds of properties, so it could continue to generate a modest level of asset sale proceeds for many years to come.

The exterior of a J.C. Penney store

J.C. Penney owns hundreds of its stores. Image source: J.C. Penney.

J.C. Penney stock trades for less than book value

A second reason for investors to give J.C. Penney stock another look is that it trades for less than book value. J.C. Penney's market cap has been hovering between $700 million and $900 million recently. By contrast, its book value -- the difference between the value of its assets and the value of its liabilities as shown on the balance sheet -- is $1.3 billion.

In theory, this means that J.C. Penney shareholders would realize a 50% gain if the company were simply to liquidate its business. In practice, going out of business would probably lead to a variety of costs and writedowns, leaving owners of J.C. Penney stock with little or nothing.

Luckily, J.C. Penney is in no danger of liquidating anytime soon. Furthermore, its real estate is likely worth more than the stated value on its balance sheet. The company has been monetizing real estate at a steady pace, booking asset sale gains and using the proceeds to pay down debt. This process allows investors to benefit from J.C. Penney's net asset value.

Sales results have been decent -- but more improvement is needed

J.C. Penney posted a relatively weak 0.2% comp sales gain last quarter, which lagged the sales results of some of its major competitors. Comp sales also came in roughly flattish in each of the past two fiscal years. However, most other department stores were posting sizable comp sales declines in 2016 and 2017. In that context, J.C. Penney's recent sales trajectory doesn't look so bad.

Nevertheless, J.C. Penney bears are right to point out that the company needs to post stronger comp sales growth going forward, regardless of how its department store peers perform. Comp sales increases are a critical enabler of margin expansion and long-term free cash flow growth.

The good news is that retail sales trends have improved dramatically over the past year. J.C. Penney is also set to benefit from a tidal wave of store closures by Sears Holdings and other competitors over the next couple of years. A few quarters of decent comp sales growth and margin improvement could send J.C. Penney stock rocketing higher.

Adam Levine-Weinberg owns shares of J.C. Penney. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.