Morningstar posted today an analysis of J.C. Penney that should give the retailer a shot in the arm. Unlike my take on the struggling retailer that I posted last month, Morningstar’s Paul Swinand sees evidence that Penney CEO Ron Johnson’s turnaround plan is bearing fruit. Swinand writes:
Despite the Street’s growing pessimism, we continue to believe that the turnaround at J.C. Penney can work for three principal reasons: the speed at which the company has been able to change, including the reduction of $1 billion in annual costs; the increased productivity of new shop-in-store installations; and broad-based improvements in merchandising (which we believe have been overshadowed by management’s pricing and promotional strategies the past year). Although we believe it will still take time for J.C. Penney’s turnaround to fully play out, we believe shares are undervalued relative to our $27 fair value estimate, based on our recent store checks focusing on shop-in-store productivity and conversations with management.
Morningstar’s fair value estimate would imply a market capitalization of about $6 billion for Penney, a figure that is hard to swallow. The stock hasn’t touched such levels since the end of Q3 2012, and given that most analysts expect the company to continue losing money well into 2014, it’s hard to see Morningstar’s fair value holding any water.
As I said last month, I do believe that Johnson’s turnaround plan has some time to get things right, but the weight of evidence suggests that a slow slide into restructuring is more likely. I’ve seen nothing in the last month that would suggest Penney is a comeback stock for retail investors, despite Morningstar’s upbeat analysis.
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