J.C. Penney Has 61% Upside? Buckingham Research Thinks So

• Shares of J C Penney Company Inc JCP are up 15 percent year-to-date from their January 1 level of $6.29.
• Buckingham Research’s David J. Glick maintained a Buy rating on the company, with a price target of $12.
• MSD comp sales momentum and continued gross margin expansion, along with lower SG&A, are expected to help the company achieve its FY17 EBITDA targets, Glick said.

Analyst David Glick mentioned that investors may have overreacted to JC Penney’s 3Q15 results and outlook. Although concerns over the department store sector remain, in view of soft overall sector sales and high inventories, JC Penney is not “over inventoried” and is in a strong position.

Recent meetings with JC Penney’s top management have boosted confidence in the company’s ability to achieve its EBITDA target for FY17. “While inventories were up 9% at the end of 3Q, it is important to note that JCP is up against LY's 3Q when inventories were -10%,” Glick stated.

JC Penney’s priority a year ago was to reduce working capital to generate positive free cash flows and thus reduce inventories significantly, the Buckingham Research report noted, while adding that the company’s raised EBITDA guidance reflects a strong operating momentum.

Continued reduction in SG&A, improved margins and comps should help the company achieve its FY17 EBITDA target of $1.2 billion. Glick added that JC Penney is expected to use its increased cash flows to reduce its debt load to $3.5B by the end of 2017.

“We recommend investors buy shares on weakness post earnings and see potential upside to $15 and to $6 in a downside scenario,” the analyst said. The price target of $13 reflects a 61 percent upside for JC Penney’s shares.