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Critical Comparison: J. C. Penney Company, Inc. (JCP) vs. EP Energy Corporation (EPE)

J. C. Penney Company, Inc. (NYSE:JCP) shares are down more than -24.68% this year and recently decreased -0.42% or -$0.01 to settle at $2.38. EP Energy Corporation (NYSE:EPE), on the other hand, is up 14.41% year to date as of 07/13/2018. It currently trades at $2.70 and has returned -8.47% during the past week.

J. C. Penney Company, Inc. (NYSE:JCP) and EP Energy Corporation (NYSE:EPE) are the two most active stocks in the Department Stores industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 67.51% for EP Energy Corporation (EPE). JCP’s ROI is 2.40% while EPE has a ROI of 3.00%. The interpretation is that EPE’s business generates a higher return on investment than JCP’s.

Cash Flow

If there’s one thing investors care more about than earnings, it’s cash flow. JCP’s free cash flow (“FCF”) per share for the trailing twelve months was -1.47. Comparatively, EPE’s free cash flow per share was -0.35. On a percent-of-sales basis, JCP’s free cash flow was -3.69% while EPE converted -8.25% of its revenues into cash flow. This means that, for a given level of sales, JCP is able to generate more free cash flow for investors.

Liquidity and Financial Risk



Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. JCP has a current ratio of 1.70 compared to 0.50 for EPE. This means that JCP can more easily cover its most immediate liabilities over the next twelve months. JCP’s debt-to-equity ratio is 3.35 versus a D/E of 10.06 for EPE. EPE is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

JCP trades at a forward P/E of 15.06, a P/B of 0.57, and a P/S of 0.06, compared to a forward P/E of 385.71, a P/B of 1.63, and a P/S of 0.73 for EPE. JCP is the cheaper of the two stocks on an earnings, book value and sales basis. 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

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. JCP is currently priced at a -28.31% to its one-year price target of 3.32. Comparatively, EPE is 0.75% relative to its price target of 2.68. This suggests that JCP is the better investment over the next year.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. JCP has a beta of 0.83 and EPE’s beta is 3.99. JCP’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. JCP has a short ratio of 8.20 compared to a short interest of 7.59 for EPE. This implies that the market is currently less bearish on the outlook for EPE.

Summary




J. C. Penney Company, Inc. (NYSE:JCP) beats EP Energy Corporation (NYSE:EPE) on a total of 9 of the 14 factors compared between the two stocks. JCP has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, JCP is the cheaper of the two stocks on an earnings, book value and sales basis, JCP is more undervalued relative to its price target. Finally, ABR has better sentiment signals based on short interest.

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