It's make or break time for J. C. Penney (JCPN.Q). Will they figure out how to offer value to the consumer in an age increasingly dominated by online shopping, or will they go the way so many doomed retail outlets have gone before them? Ask anyone you know their opinion of good old JCP and you'll no doubt get one. Some will say, "They're doomed." Others will say, "They'll turn it around." Most will probably give an answer somewhere in between. Believe it or not, and despite the plethora of varying opinions, there is one party that is surprisingly bullish on the long term earning power of the 103 year-old retailer: Wall Street. Yes, that's right. Despite all that has happened to JCP over the last five years, and that the company had two serious issues just two years ago, Wall Street seems to be buying into the turn around. Which of course begs the question, what exactly is going on here?
What Wall Street Thinks
Despite the fact that shares of JCP have sold off along with the rest of the retail sector as of late, Wall Street analysts are optimistic, as evidenced by earnings estimates polled by S&P Capital IQ:
| FY 2016 | FY 2017 | FY 2018 | FY 2019 | FY 2020 | |
|---|---|---|---|---|---|
|
GAAP Earnings Per Share Estimates |
($1.19) | ($0.26) | $0.50 | $1.07 | $1.70 |
|
Total Revenue Estimates |
$12.65 billion | $13.05 billion | $13.39 billion | $13.88 billion | $14.49 billion |
|
Number of analysts polled |
18 | 18 | 10 | 3 | 2 |
Source: S&P Capital IQ
Am I missing something here? S&P goes to great lengths to poll the Wall Street analysts, whose job it is to estimate, to the best of their abilities, the future earnings of J.C. Penney and they all forecast not only a rebound but solid profitability by the end of the decade? Why isn't anyone talking about this?
Wall Street Becomes a Believer
To be fair, the record of Wall Street analysts and their earnings projections are abysmal at best. However, it is telling that the average analyst who projects that far out for JCP not only thinks the company will survive that long, but will be profitable. So why are these analysts putting their names on the line for a beleaguered department store? The answer, dear reader, is gross margins.
As recently as fiscal year 2014, JCP had to discount heavily in order to attract its alienated customers back. Not only was J.C. Penney lacking traffic, but it was hemorrhaging cash as gross margins slipped to as low as 23.8% in the quarter ended Feb. 2, 2014. Now that margins have normalized, and customers are slowly returning as evidence by JCP's same store sales growth gains over the past year, Wall Street has slowly warmed up to the JCP turnaround story.
Foolish Takeaway
JCP may have some on Wall Street convinced, but should we take them at their word and dive into JCP as well? I, for one, am a believer in the turnaround. It seems that despite its past mistakes, there is a place for J.C. Penney in America's malls for the time being. However, shares currently trade for $8 a share. That may seem "cheap" at first glance, but Wall Street's admittedly optimistic estimates for the company's earning power a full five years in the future project that the company will earn $1.70 per share. Given the inherent risks inherent in any turnaround story, it may very well not be worth the risk. Especially when much stronger players in the sector, such as Macy's (M -1.06%), trade for as little as 10 times forward earnings estimates. JCP is probably going to pull this off, but it probably won't make investors a boat load of money either.
