Tuesday, March 5, 2013

J.C. Penney Stock ... There's a Spoilsport in Every Crowd

The market is going gangbusters today, setting new highs.

But there is no joy in Mudville. It appears that J.C. Penney may be about to strike out.

J.C. Penney Falls After Vornado Said to Sell Shares has the sad story about the fall of the share price of the old line retailer:

"J.C. Penney Co. slid to an almost four-year low after Vornado Realty Trust, once its second- biggest shareholder, sold almost half of its stake in the struggling department-store chain, according to two people familiar with the offering.

Vornado sold a 10-million share block of J.C. Penney stock at $16.40 each through Deutsche Bank AG, said the people, who asked not to be identified citing lack of authorization to speak publicly. J.C. Penney fell 9 percent to $15.24 . . . after sliding as low as $15.05, the lowest intraday price since March 2009.

The department-store company, led by former Apple retail chief Ron Johnson, last week reported a 25 percent decline in annual revenue to $13 billion, the lowest since at least 1987. Johnson, who joined as CEO in November 2011, has lost customers with a shift to everyday low prices, which he has since backtracked on, and as he tries to transform most of the company’s stores into a collection of 100 boutiques. Vornado chairman Steven Roth is a member of J.C. Penney’s board.

“We think Vornado could be back in the market in the near-term to sell its remaining 8.6 million shares,” Lorraine Hutchinson, an analyst at Bank of America Corp. in New York, wrote in a note today. “Our work indicates that monetizing J.C. Penney’s real estate would be difficult and substantially less lucrative than the market initially thought.”

Hutchinson reiterated her underperform recommendation, the equivalent of a sell, on the Plano, Texas-based retailer’s stock, saying it will remain under pressure “due to deteriorating investor confidence” in the turnaround. . . .

“With Vornado selling, the value of J.C. Penney-owned real estate should be questioned,” Rick Snyder, an analyst at Maxim Group in New York, wrote in a note today. Snyder estimates J.C. Penney’s real estate is worth about $50 per square foot, and at that level, it would not be enough to cover the company’s $2.9 billion of long-term debt.

J.C. Penney’s shares declined 44 percent from June 13, 2011, through yesterday, the day before Johnson was announced as J.C. Penney’s next CEO. The Standard & Poor’s 500 Retailing Index gained 45 percent in that time."

{NOTE: For an equally pessimistic view on Penney, see also J.C. Penney Hits Four Year Low: Analyst Warns on Real Estate.}

Summing Up

Owning the shares of solid companies is always a good idea. Turnaround situations may work, but they may fail.

That's why I always recommend playing it safe when it comes to individual investing. As Warren Buffett puts it, it's better to buy wonderful companies at a fair price than to buy fair companies at what may appear to be a wonderful price.

Another saying of Buffett's that rings true with J.C. Penney and its star CEO is that when a bad company meets up with a new CEO with a great reputation, it's usually the reputation of the company that remains intact.

Or as yet another of my favorite aphorisms goes, when investing always remember that pigs get fat and hogs get slaughtered.

So always be a pig and stay with the shares of good blue chip companies. J.C. Penney hasn't been in that category for a long, long time.

The world of private sector retailing is Darwinian for sure. Adapt to changing customer expectations and competitors' offerings or cease to exist. It's a very simple message.

And it's a message totally unlike anything in the largely unproductive and non-customer centric monopolistic world of the public sector.

Yes, it makes a huge difference when MOM and the customer are in charge and not the government knows best gang.

That's my take.

Thanks. Bob.

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