PENNEY (J C) CO JCP
May 26, 2016 - 6:14pm EST by
surf1680
2016 2017
Price: 0.70 EPS 0 0
Shares Out. (in M): 306 P/E 0 0
Market Cap (in $M): 2,393 P/FCF 0 0
Net Debt (in $M): 4,600 EBIT 0 0
TEV ($): 6,993 TEV/EBIT 0 0

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Description

I recommend buying JCPenney 7.625% corporate bonds that mature in the year 2097.  Finding somewhere to allocate money nowadays is like trying to choose a president – the least sucky candidate gets the votes.  JCPenney, while a terrible looking business at first blush, is one of the least sucky investments out there right now.  It is an unusual investment but I believe you’re at least going to get your investment money back.  The rest is gravy.

 

In a nutshell, our paypack period is 10 years for this investment.  You pay 70 cents and you receive 7.625 cents per year.   Ignore the fact that your money is tied up for 81 years.  You’ll get your initial outflow back in under 10 years.   Trying to guess what happens beyond 10 years is impossible*.

 

Now that we’ve accepted 10 years as our breakeven horizon, we notice that 30% of JCP’s outstanding debt is due within the next 4 years.    In fact, almost nothing** at all is due from 2020-2036.   Even better, it appears JCP has the willingness and the ability to repay all the debt coming due over the next 4 years.   Thus, if you can get comfortable with the next 4 years, you should be pretty comfortable with the next 10 years (our magic number). 

 

Here’s how I got comfortable with the next four years and their ability to roll/repay debt:

 

(1)   The ratings agencies are comfortable with it and are talking about a possible upgrade.

(2)   Management has been delivering over the last few years.  They are focused on the balance sheet.  They are improving leverage ratios.   Operationally, they are treading water, but we have seen real improvement in the balance sheet.  We don’t need growth for this idea to work.

(3)   The market has spoken.  It is pricing existing JCP debt of same seniority that matures in the next 4 years with .99999 probability that it will be repaid (i.e it is trading close to or above par).

 

So, the two important things I want to point out that maybe other people are missing:

1.     (1) No scheduled debt repayments from 2020-2036.  In fact, no huge outlays.  No one seems to care and why should they.

2.     (2) While this bond has a 81 year maturity, the modified duration (sensitivity to interest rates) is actually less than that of a 10-year gov’t bond!

 

 

Warren Buffett recently said to buy stuff that you’d be willing to hold if the markets closed for the next 10 years.  I think that is his nice way of saying things are expensive right now.  JCP century bonds qualify as the type of investment you can buy & forget about for the next 10 years.  You’ll get your money back and maybe a nice surprise.

 

 

* I won't be here when this bond matures

** $10 million is due in 2023

*** Coke century bonds with similar maturity & coupons trade at 5% ytm, Ireland issued century bonds with 2.5% ytm.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

(1)  Ratings agency upgrade when debt to equity falls to 3:1.

(2)  Omnichannel success

(3)  Credit card penetration

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