Times have been hard for J.C. Penney Company (OTC:JCPN.Q), 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(OTC:JCPN.Q), 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.
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.