Topic: Growth Stocks

J.C. Penney Co. Inc. $41 – New York symbol JCP

J.C. PENNEY CO. INC. $41 (New York symbol JCP, Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 220.0 million; Market cap: $9.0 billion; WSSF Rating: Average) operates 1,074 department stores throughout the United States.

In response to the recent slowdown in consumer spending, Penney has scaled back its expansion plans. It also aims to cut its inventory levels. That should help it stay profitable, and let it keep paying its $0.80 dividend (2.0% yield).

In the three months ended May 3, 2008, earnings fell 48.1%, to $0.54 a share from $1.04 a year earlier. Slow sales forced Penney to cut selling prices to clear unsold seasonal merchandise. Sales fell 5.8%, to $4.1 billion from $4.35 billion. Same-store sales declined 7.4%.

Penney continues to expand its portfolio of exclusive private label brands, such as the American Living line of clothing and home accessories it developed in partnership with Polo Ralph Lauren. Private labels tend to generate higher profit margins than national brands.

Despite the recent slump, Penney’s balance sheet is still strong. It holds cash of $1.9 billion ($8.75 a share), and its long-term debt of $3.5 billion is a manageable 40% of its market cap.

The stock trades at 12.1 times the $3.40 a share that Penney will probably earn in fiscal 2009. It also trades at just 0.5 times its sales of $88 a share.

J.C. Penney is a buy.

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