JC Penney's Risk/Reward Favorable Following Recent Pullback Below $7

Baird remains Outperform-rated on J C Penney Company Inc JCP saying the risk/reward on shares is favorable following the recent pullback below $7.

“While the path to +LSD% comps will likely be an uphill climb, we view risk/reward as favorable following the pullback to ~$7 (would trim positions if reach low-double-digit range),” analyst Mark Altschwager wrote in a note.

That said, the analyst is more cautious on the top-line outlook given significant sector/apparel headwinds. But, he believes JC Penney still has opportunity to reach $1.2 billion in EBITDA in 2017.

Altschwager expects JC Penney to provide formal guidance on the fourth quarter call and reiterate its $1.2 billion EBITDA target.

Among others, the analyst believes guidance may reflect flat to +LSD% comps, slight gross margin expansion, additional cost savings, and CAPEX near $400-$425 million.

“Improvement in apparel could provide upside to these initial comp assumptions; however, if the "baseline" industry comp remains down L-MSD%, consolidated comp growth could prove difficult,” Altschwager continued.

Meanwhile, investors could question the sustainability of recovery as the near-term targets are achieved mainly by cost cuts and asset sales instead of positive comps.

“Still, near $7 we believe shares reflect a more skeptical view, supporting attractive risk/reward,” Altschwager added.

At last check, shares of JC Penney gained 4.14 percent to $7.04. The analyst has a price target of $11.