JCP - Valens Credit Report - 2017 11 01
- Credit markets are grossly overstating credit risk with a CDS of 1,219bps and cash bond YTW of 9.548% relative to an Intrinsic CDS of 381bps and Intrinsic YTW of 5.538%. Furthermore, Moody's is materially overstating JCP's fundamental credit risk, viewing the firm as a highly speculative, high-yield credit with its B3 rating, six notches lower than Valens' XO (Baa3) rating - Incentives Dictate Behavior™ analysis highlights that JCP's management compensation framework should focus management on improving margins and expanding revenue over time, while also focusing on asset utilization, which should lead to Uniform ROA expansion and increased cash flows available for servicing obligations. Moreover, management's low change-in-control compensation signifies that they are not incentivized to seek a sale of the company, limiting event risk - Earnings Call Forensics™ of the firm's Q2 2017 earnings call (8/11) highlights that management generated an excitement marker when talking about their new partnership with Electrolux home appliances - JCP is trading at a 0.9x UAFRS-based P/B, which is low relative to historical valuations. However, equity markets appear to be pricing in the best-case scenario for operational turnaround, likely limiting equity upside from operational improvement. That said, because JCP trades at a discount relative to its asset values, credit-driven equity upside may be warranted
J. C. Penney Company is a holding company whose principal operating subsidiary is J. C. Penney Corporation, Inc. The company's business consists of selling merchandise and services to consumers through its department stores and its website at jcpenney.com. The company's department stores and website serve the same type of customers, its website provides the same mix of merchandise as its store assortment along with other extended categories that are not provided in store, and its department stores accept returns from sales made in stores and via its website. The company sells family apparel and footwear, accessories, jewelry, beauty products through Sephora inside JCPenney, and home furnishings.
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