JC Penney’s (JCP) shares have skyrocketed as the company has managed to take itself off deathwatch. That gain is too much for the folks at Imperial Capital, who believe there’s better value in JC Penney’s debt than its equity.
Bloomberg Imperial’s Mary Ross-Gilbert and Seweryn Sztalkoper explain why they like JC Penney’s bonds…
We are maintaining out BUY ratings on the longer-dated senior notes (maturing in 2020-2097)…We think the bonds likely continue to trade up (for potential returns of ~20%) on anticipated favorable operating momentum in F2Q14-4Q14, benefiting from: 1) full restoration of private and exclusive brand assortments, 2) the re-merchandise of the “home” department (which was closed for the better part of 2013), 3) elimination of “excess” clearance inventory, and 4) easy comparison to the last two years, which experienced comp sales declines of approximately 30% in F2Q-FQ4. Furthermore, at recent prices in the low-80s, the longer dates bonds create JCP at 37% of revenue (45% excluding excess cash), which compares favorably to other major department store retailers trading in the 43% – 91% range.
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…and why they don’t like JC Penney’s stock:
We are maintaining out Underperform rating on the shares and our one-year price target of $2.50, reflecting the leveraged optionality on the shares based on valuation. With recent favorable upside momentum in the shares, we think JCP could consider another secondary stock offering with proceeds to go toward reducing debt…dilution and valuation using FY15 EBITDA cannot support the current share price.
Shares of JC Penney have jumped 4% to $8.94 today.
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