When you try to value a business, you invariably consider the business as a going concern and apply your inputs. It could be a dcf valuation or a comparable valuation. Rarely will you use inputs considering the business as a dead firm. But what happens if your anticipated earnings turn out to be far lower than its current total assets? The classic term for this is that the business is currently worth more dead than alive.
Well, that may be the case for JC Penny for currently it may be selling for less than its assets. If this report has to be believed the firm's assets, mainly real estate, could be worth about $5-10 billion where as the equity is selling at $3.27 billion. With the total liabilities of $6.6 billion including debt of $3 billion, the stock market may be discounting the business in its liquidation form; but not too sure.
Nevertheless, key beneficiaries will not be the stockholders since most of the cash realized will go to the lenders and other creditors; the residual, if any, will be for the stockholders. Is it worth it? Ask the lenders and stockholders, you may likely get different answers; you see, agency issues do creep in.
What is the cause of all this? Continuing operating and net losses; the business suffered operating loss of $745 m and net loss of $552 m in the latest quarter; cash flows were somewhat better mainly because of reduction in inventories. For the full year ended 1 Feb 2013, it had operating loss of $1.3 b and net loss of $980 m on revenues of $13 b. Revenues have been falling; there are large lease commitments too.
Here is the latest attempt to raise cash; but will it succeed? Retailing is a tough business unless you turn those lower margins into higher return on capital. It is proving to be more difficult even for this 100-plus year old firm.
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