J.C. Penney: A buy or a sell?

  @FortuneMagazine August 15, 2013: 7:33 AM ET
OFF02 sterling snyder

Caig Sterling, EVA Dimensions (left) and Rick Snyder, Maxim Group

(Fortune)

Will the return of its former CEO lift shares of beaten-down retailer J.C. Penney? We asked two stock watchers to face off.

Bear: Craig Sterling, managing director, EVA Dimensions

I can go back 20 years and count on one hand the number of retail companies that have destroyed as much shareholder value as J.C. Penney (JCP, Fortune 500) has. None of them recovered. The average EVA margin -- a company's true economic profit net of operating and capital costs -- was 1.6% for U.S. companies last year, and within retail the median was 1.4%. J.C. Penney's was -14%. J.C. Penney makes Hewlett-Packard (HPQ, Fortune 500) look good, even Sears -- and that's hard to do. Kohl's (KSS, Fortune 500) and Macy's (M, Fortune 500) are not going to just sit back and let J.C. Penney win over their customers. Even if Penney hits revenue targets, at a recent price of $14 the stock is still overvalued based on EVA profits. This company is destroying economic profits at historic proportions. Long-term investors should not go anywhere near the stock.

Bull: Rick Snyder, senior retail analyst, Maxim Group

The big thing is that Mike Ullman is back as CEO, replacing Ron Johnson. Nobody knows J.C. Penney's core customers better, and that's crucial considering Penney has spent the past year essentially trying to fire them. Ullman has brought discounts back. As we walk through the stores, we're seeing lines at the cash register that were nonexistent last year. Penney doesn't even need to convince all its former customers to return, because one good thing Johnson did was leave behind a leaner cost structure, trimming $900 million out of selling and administrative expenses. In 2014 we predict that revenue will grow by 8% and the company will earn 56ยข a share, as opposed to losing $2.70 a share this year. We have a price target of $27.

J.C. Penney drama takes center stage

This story is from the September 2, 2013 issue of Fortune. To top of page



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