J. C. Penney's (JCP) EBITDA Target Could be 'Floor', Not 'Ceiling', Says Sterne Agee CRT; Rating Upgraded to Buy

(Updated - September 28, 2015 9:58 AM EDT)

Sterne Agee CRT upgraded J. C. Penney (NYSE: JCP) from Neutral to Buy with a price target of $13. Analyst Charles Grom said he was more confident in the company’s turnaround plan following meetings with CEO Marvin Ellison. He went on to say the company's $1.2 billion EBITDA target may prove to be a floor rather than a ceiling

"... after a tumultuous 5-year period (and some would argue 15 years, since Allen Questrom left the building), Mr. Ellison has the right demeanor, discipline, and business acumen to “right the ship”. Further, while industry headwinds remain in the challenged department store space, we think Penney’s “self-help” initiatives will drive significant EBITDA improvements, so much that the current $1.2B EBITDA goal, which many view as a ceiling . . . will soon become a floor," said Grom.

"First, the target implies LSD comps, which while appropriate, could prove to be conservative given that Penney’s SPSF currently stands at ~$116 (‘14/’15E avg.) – significantlylower than where it stood 10 years ago (2005 @ $185) and far below peers (M @ $187, KSS @ $190, JWN @ $503). Second, the target also suggests a 36.5% GPM rate, which should have upside," continued the analyst. "Third, before the Great Recession JCP was able to deliver EBITDA well in excess of $2.0B (2005-2007) so if the company can execute on its strategy to generate more revenue per customer (see sales driver point below), we think there is a good shot the company can over-deliver on its promise."

Grom added, "Penney’s stock has rallied 45% YTD, and consequently has one of the highest RSI readings in our group at 60. Having said that,sentiment still remains mixed amongst our client base and short interest is still a sector high ~30% with only 24% of sell-side analysts rating the stock a “Buy.” With the stock at ~$9, still well below levels attained in the past, and, in our view, not discounting the upside we see in LT targets (as outlined above), we are upgrading shares to Buy and are establishing a Dec 2016 $13 price target, based on 6.5x our FY17 EBITDA estimate."

For an analyst ratings summary and ratings history on J. C. Penney click here. For more ratings news on J. C. Penney click here.

Shares of J. C. Penney closed at $9.43 yesterday.

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