Analysts at Bank of America Merrill Lynch (BAML) upgraded their rating for the shares of J.C. Penney Company, Inc. (NYSE:JCP) saying that its capital structure is becoming stable.

J.C. Penney

“Liquidity concerns are behind us for now, and fundamentals are becoming to bottom in the coming quarters,” wrote BAML analysts Lorraine Hutchinson and Jessica Lebo. The analysts raised their rating for J.C. Penney Company, Inc. (NYSE:JCP) from underperform to neutral with a $20 price objective.

Hutchinson and Lebo emphasized that the company is in the process of securing a $1.75 billion term loan and tendering $254 million of 7.123 notes due on 2023, which should ease near-term liquidity concerns. According to them, they do not expect the company to be free cash flow positive over the next few years. The analysts anticipate that JC Penney Company Inc (NYSE:JCP) will still experience a negative free cash flow of -$927 million in 2013 and -$364 million next year. Take note that Hutchinson and Lebo projected that the company’s free cash flow will improve.

According to them, “We think the repaired balance sheet, coupled with new (and former) CEO Mike Ullman’s strong vendor relationships, should ease concerns about vendors tightening credit terms with JC Penney.”

The analysts said that J.C. Penney Company, Inc. (NYSE:JCP) ended the first quarter with a better-than-expected net debt of $3 billion compared with $3.5 billion estimate. They believe that the capital expenditures of the company will normalize after the launching of its Home Department, and the “costly shop roll out is over for now.” They projected that the company’s capex runrate will be around $600 million, which is approximately its FY 2011 level. They pointed out that a “fortified balance sheet and a less aggressive capex plan” are the right steps for the company.

In addition, Hutchinson and Lebo pointed out that they remain cautious with the gross margin of J.C. Penney Company, Inc. (NYSE:JCP), and traffic is important for the stock. In their research note to investors, they wrote, “JC Penney’s 2012 GM was 31.3 percent 800bp below the peak in 2009. With so much damage done and our expectations for substantial GM deterioration in 1H13, we are not confident the JC Penney can fully recover. We are modeling 300bp of General Motors Company (NYSE:GM) improvements in 2013E and 2015E. However, we expect stabilizing traffic and less negative sales to be important stock considerations over the next few quarters.”

The analysts believe that returning coupons, promotions, and more traditional marketing strategies will help reverse J.C. Penney Company, Inc. (NYSE:JCP) sales declines. The shares of the company are trading around $18.91 per share, down by 0.32 percent around 11:29 AM on Thursday in New York.

J.C. Penney Company, Inc. (NYSE:JCP) is scheduled to report its full first quarter earnings result today, May 16, 2013 at 4:30 in the afternoon Eastern Time.