JCP - Valens Credit Report - 2018 01 24
- CDS markets are grossly overstating credit risk with a CDS of 875bps relative to an Intrinsic CDS of 508bps, while cash bond markets are overstating credit risk with a cash bond YTW of 8.982% relative to an Intrinsic YTW of 7.672%. 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 Q3 2017 earnings call (11/10) highlights that management may be exaggerating their ability to pay their balance in their ABL Facility by the end of the fiscal year, and may lack confidence in their ability to achieve their EPS guidance. Furthermore, they may be concerned about the sustainability of the incremental foot traffic in Fenty, and may lack confidence in their ability to continue to drive market share gains and maintain recent sales results in their home appliance category - JCP is trading at a 0.9x UAFRS-based (Uniform) 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
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