Imperial Bullish on J.C. Penney Debt, But Not the Equity

By Mani
Updated on

Imperial Capital has maintained its Underperform rating on J.C. Penney Company, Inc. (NYSE:JCP) and pegged its 1-year price target at $5 per share.

Imperial Bullish on J.C. Penney Debt, But Not the Equity

However, Imperial Capital in its recent capital structure research report maintained its Buy rating on J.C. Penney Company, Inc. (NYSE:JCP)’s term loans and all bonds maturing after 2015.

J.C. Penney’s sales to grow 6.5 percent

Mary Ross-Gilbert of Imperial Capital anticipates J.C. Penney Company, Inc. (NYSE:JCP) to post 6.5 percent increase in its sales during F4Q13 year-on-year, with its gross margin up 771 bps yoy to 31.5 percent as against 23.8 percent posted in F4Q12.

Imperial Capital estimates J.C. Penney Company, Inc. (NYSE:JCP) will report EBITDA of $153 million as against negative $278 million posted during F4Q12.  Mary Ross-Gilbert believes that if the retail major achieves or exceeds these targets, its bonds will trade up, offering an attractive potential return to investors. The analyst anticipates such a performance will also take its stock up, though she expects the shares will remain volatile.

J.C. Penney in early stage of recovery

Last week, J.C. Penney’s CEO Mike Ullman indicated the company is in an early stage of recovery and it has enough cash to last until the end of the year. J.C. Penney Company, Inc. (NYSE:JCP)’s September sales improved by 580 basis points compared to its sales in August.

Imperial Capital’s analyst feels the retail major would benefit from seasonal cash generation from working capital, as she anticipates F4Q13 free cash flow of $484.5 million which would boost the company’s cash position to $1.79 billion by FYE, and that when added to revolver availability estimated at $325 million, the company’s liquidity would total $2.12 billion in line with guidance provided by management in August.

Equity issue enhances cushion

The retail major announced the completion of its 84 million shares public offering.

Imperial Capital’s analyst anticipates J.C. Penney Company, Inc. (NYSE:JCP)’s recent equity raising offers sufficient cushion to fund its operations over the next 12-24 months.  The analyst also points out the retail major can still tap $400 million ‘accordion’ feature on its revolver for $360 million and could raise another $500 million in second lien financing using approximately $900 million in unencumbered real estate.

The analyst maintains a Buy rating on all bonds maturing beyond 2015 at the prices shown in the following table:

JCP - Select loans and securities

Mary Ross-Gilbert of Imperial Capital favors the longer-dated bonds trading in the 60s as the analyst anticipates such bonds could generate 22-29 percent annualized returns over the next 1 to 2 years, including current yields of 9 to 12 percent.

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