It's rare that you read a positive headline about J.C. Penney Company (NYSE:JCP) these days. In fact, it's rare you even hear about J.C. Penney anymore. ("They're still around? Didn't they go bankrupt? Or was that Woolworth's?") And yet, here's a surprising fact for you:

Over the past 12 months, J.C. Penney stock is up 23%.

And here's another: One analyst thinks J.C. Penney is going to go up some more.

The news at 7
Priced at $7 and change today, J.C. Penney could be poised to explode higher -- to as much as $9 a share, if you believe the analysts at Nomura Securities.

You see, according to this banker, Penney "has a lot of opportunity for top-line growth and margin expansion under new CEO Marvin Ellison, following multi quarter 20%+ comp declines and a $4bn loss in sales volume under CEO Ron Johnson in 2012-2013." And reports that Nomura is also betting on Penney saving a few bucks on interest, as it pays down its debt load.

Between the anticipated sales growth, and the reductions in cost, Nomura now thinks it's at least possible that Penney will earn a profit as early as 2017 -- perhaps as much as $0.35 per share. And with the analyst valuing these putative profits at a multiple of 25.7 times, Nomura is ready to not just remove its "reduce" (aka "sell") rating on the stock, but raise its price target as well -- to $9 a share.

Wait, go back a minute -- did you say "25.7"?!
That's right. Key to Nomura's decision to upgrade J.C. Penney to "neutral" is the banker's contention that J.C. Penney shares are worth nearly 26 times annual earnings, and thus likely to rise in price if profitability returns to the company. But there are at least a couple problems with this reasoning.

First and foremost, Penney currently is not currently profitable. Despite its sharp rise in stock price, trailing-12-month profits at the department store retailer are still deeply in the red.

And second, according to most analysts who follow this stock, Nomura is jumping the gun on predicting profitability in 2017. Most folks who follow Penney stock believe there won't be any profits to speak of before 2018 at the earliest. Indeed, the consensus view on J.C. Penney at this time is that profits will average 2% annual declines over the next five years.

S&P Capital IQ data show analysts projecting $2.53 per share in losses for Penney this year, another $1.22 lost in 2016, and then $0.30 lost in 2017. Granted, analysts do believe that Penney can return to profitability by 2018, and that it may ultimately earn as much as $1.39 per share in 2020 -- but not before first racking up a whole heaping helping of red ink.

And this is a reason for an upgrade?
Apparently so -- at least in Nomura's estimation. According to this analyst, if J.C. Penney succeeds in earning its $0.35 predicted profit in 2017, then those profits are worth a valuation 27 times higher -- hence the $9 target price. According to Nomura, that's not an unreasonable valuation for a "broadlines/department store" stock.

But is Nomura right?

Let's go to the tape
Perhaps -- but I wouldn't bet on it. You see, in many respects, Nomura Securities is a fine analyst. It's just not a very good retail analyst.

According to our data on Motley Fool CAPS, where we've been monitoring Nomura's performance for the past three years or so, this banker generally ranks in the top 5% of investors we track. But it earned this ranking primarily from its stellar records in such "techy" sectors as media, wireless telecom, and IT services, areas where it's scored 80% or better for accuracy on its picks.

In retail, in contrast, Nomura's record is no better than 50-50. For example, the analyst has picked:



Nomura Said:

CAPS Says:

Nomura's Picks Beating (Lagging) S&P By:

Ulta Salon, Cosmetics & Fragrance (NASDAQ:ULTA)



20 points

Sherwin-Williams (NYSE:SHW)



17 points




(23 points)

Bed Bath & Beyond



(47 points)

So like I said, Nomura's record on retail is a bit subpar. That's not to say it's necessarily wrong about J.C. Penney, of course. In fact, Nomura's recommendations of both Ulta and Sherwin-Williams have beat the market admirably over the past year.

Neither stock is currently cheap today of course. Sherwin-Williams' valuation is pushing 26 times earnings, while Ulta has a P/E of nearly 40. But at least, with projected growth rates of 18% and 20%, respectively, these two stocks are profitable and growing more so -- which is not the case with J.C. Penney at all.

The upshot for investors
Indeed, the sad truth is that for J.C. Penney, the odds just don't look good -- based on the numbers Nomura's been putting up, and on J.C. Penney's own numbers, as well.

With no profits earned in the past five years, no free cash flow generated in the past four years, and an enormous debt load, the company's just not in the kind of strong financial position where you'd expect it to outperform the rest of the stock market. And for that matter, with no free cash flow to speak of, it's hard to see how Nomura can be right about J.C. Penney working down its debt load to any appreciable extent, permitting profits to begin flowing again.

Long story short, this looks to me like a case of "two strikes, and you're out." Nomura's a bad analyst, and J.C. Penney's a bad stock. Stay away.

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