Credit Suisse Upgrades JC Penney To Neutral

• J C Penney Company Inc JCP shares have lost 26 percent since October 29.
• Credit Suisse’s Michael Exstein upgraded the rating for the company from Underperform to Neutral, with a price target of $7.
• The company has shifted its focus to what it can control, and has made debt reduction a priority for now, Exstein stated.

Analyst Michael Exstein wrote, “We are upgrading JC Penney to Neutral, not on any significant change in business expectations, but on a shift in messaging to prioritize debt pay down.” He believes the company would be able to lower its total outstanding debt by almost 20 percent by the end of 2017.

Moreover, JC Penney has already prepaid and retired its $500 mn term loan in December 2015. Exstein estimates that the company’s cash flow and asset sales would be enough to cover an additional debt pay down of $400-500 mn over the next couple of years.

“This focus on debt reduction could allow JCP to maintain its current share price despite multiple decay by shifting its enterprise value from debt to equity,” the analyst wrote.

JC Penney continues to face challenges in generating meaningful top-line growth. Even positive comps may not result in significant revenue growth, since the company continues to be “a net closer of stores.” Exstein added that the only top-line growth that JC Penney may be able to generate would likely be from the lower margin e-commerce channel.

In the report Credit Suisse noted, “We continue to think it will be challenging for JCP to achieve its '17 EBITDA target of $1.2 bn without significant sales growth; however, we think that $1.0 bn should be attainable given greater expense savings.”