Earnings

Should You Buy J. C. Penney Company, Inc. (JCP) or Macy’s, Inc. (M)?

  1. C. Penney Company, Inc. (NYSE:JCP) shares are up more than 29.43% this year and recently increased 3.02% or $0.12 to settle at $4.09. Macy’s, Inc. (NYSE:M), on the other hand, is up 4.41% year to date as of 01/11/2018. It currently trades at $26.30 and has returned 7.39% during the past week.

    J. C. Penney Company, Inc. (NYSE:JCP) and Macy’s, Inc. (NYSE:M) are the two most active stocks in the Department Stores industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

    Growth

    One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Comparatively, M is expected to grow at a 18.64% annual rate. All else equal, M’s higher growth rate would imply a greater potential for capital appreciation.

    Profitability and Returns



    Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 9.84% for Macy’s, Inc. (M). JCP’s ROI is 5.90% while M has a ROI of 8.70%. The interpretation is that M’s business generates a higher return on investment than JCP’s.

    Cash Flow 

    Earnings don’t always accurately reflect the amount of cash that a company brings in. JCP’s free cash flow (“FCF”) per share for the trailing twelve months was -1.07. Comparatively, M’s free cash flow per share was -1.22. On a percent-of-sales basis, JCP’s free cash flow was -2.66% while M converted -1.44% of its revenues into cash flow. This means that, for a given level of sales, M is able to generate more free cash flow for investors.




    Liquidity and Financial Risk

    Liquidity and leverage ratios are important because they reveal the financial health of a company. JCP has a current ratio of 1.40 compared to 1.30 for M. This means that JCP can more easily cover its most immediate liabilities over the next twelve months. JCP’s debt-to-equity ratio is 4.17 versus a D/E of 1.49 for M. JCP is therefore the more solvent of the two companies, and has lower financial risk.

    Valuation

    JCP trades at a forward P/E of 21.64, a P/B of 1.18, and a P/S of 0.10, compared to a forward P/E of 9.23, a P/B of 1.90, and a P/S of 0.32 for M. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

    Analyst Price Targets and Opinions

    A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. JCP is currently priced at a 8.49% to its one-year price target of 3.77. Comparatively, M is 5.45% relative to its price target of 24.94. This suggests that M is the better investment over the next year.

    The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 3.00 for JCP and 2.90 for M, which implies that analysts are more bullish on the outlook for JCP.

    Risk and Volatility

    To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. JCP has a beta of 0.56 and M’s beta is 1.00. JCP’s shares are therefore the less volatile of the two stocks.

    Insider Activity and Investor Sentiment

    Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. JCP has a short ratio of 7.22 compared to a short interest of 4.03 for M. This implies that the market is currently less bearish on the outlook for M.

    Summary

    Macy’s, Inc. (NYSE:M) beats J. C. Penney Company, Inc. (NYSE:JCP) on a total of 9 of the 14 factors compared between the two stocks. M has higher cash flow per share, is more profitable, generates a higher return on investment, has a higher cash conversion rate and has lower financial risk. M is more undervalued relative to its price target. Finally, M has better sentiment signals based on short interest.

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