Investors should take a closer look at J C Penney Company Inc JCP's bonds as they can generate "equity-type" returns, at least according to Mary Ross Gilbert of Imperial Capital.
In a note published Thursday, Gilbert argued that JC Penney continues to demonstrate improvements and successes in its turnaround plans to deliver nearly mid-single digit comp sales growth on higher margins. The analyst argued that the positive strives should drive JC Penney's bond prices higher, which will result in attractive returns for the longer-dated bond issues.
Gilbert is estimating a potential IRR of 24 to 38 percent over the next year for long-dated (2036-2097) bonds. The analyst noted that the 6.375 percent senior notes due 10/15/36 (one of the more liquid issues) was recently quoted at 73, implying an IRR of 27 percent over the next year, assuming they trade up to a price of 85. Meanwhile, the 7.625 percent debentures due 3/1/2097 were recently quoted at 72, offering a potential IRR of 38 percent over the next year, assuming it trades up to 90.
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On the other hand, Gilbert argued that JC Penney's financial situation is expected to improve "significantly" over the coming years, the company's high debt levels and EBITDA improvements are "not sufficient" to justify the recent share price gains.
Gilbert maintained an Underperform rating with an unchanged $5 price target.
The analyst added that the price target reflects a 7.0x EBITDA valuation multiple which nearly in-line with its peers, such as Macy's, Inc. M's 6.9x multiple. In fact, the analyst argued that a $5 price target may even be "high" given its "significantly" greater debt leverage which is estimated at 5.3x versus "well under" 2x for Macy's.
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