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No. of Recommendations: 5
Dear Fools,

Just starting my DD on JCP and would love to hear any thoughts or opinions based on my initial research.

1. From the moment I looked at JCP's financial performance, it was obvious that some major event had taken place in 2000 / 2001 that significantly reduced the shareholders value. After some online research it appears that this was a result of a steady erosion in performance over a number of years culminating in the negative earnings statement of 2000 when the recession finally hit. The "turn around" seems to have been attributed to Penney's then new CEO, Allen Questrom (2000 - December 2004) who had already had some success in turning around Federated Department Stores and Barneys.

Since then, JCP has produced steadily increasing OE / EPS (38.2% CAGR), has maintained its dividend, improved its ROE and ROTC and reduced debt. As a result, I will evaluate the performance of the company from 2001 onwards, but will bear in mind that negative performance as experienced in the early part of the decade is never far away.

2. ROE and ROTC have continued to grow since 2001, beginning at just 5%, growing to 25% and 16% respectively in 2006.

3. The company's long term debt is $3bln on annual earnings of $1bln.

4. The company dividends shrank from around $2.00 in 1999 to $0.50 in 2001. Since then they have been maintained and has been slowly increased.

5. The P/E has remained fairly constant throughout the last 10 years ranging between 12 and 15 times current earnings. Most recently (January 2008) the P/E has dropped to 8.5 times current earnings.

6. "Not satisfied, the company announced a new long-range plan designed to increase earnings per share by 16% per year from 2008 through 2011. This includes creating 250 new stores and renovating 300 existing ones". Value Line in its May report of JCP projects an earnings growth of between 8% and 19% over the next 5 years and as this is in line with the company announcements we will use VL's range for our valuation producing an Owner Earnings Present Value Range of $4.19 to $11.04. The current P/E of 8.7 times is historically low, and as a result has been increased to 12 times earnings to forecast our fair price range producing:

Fair present price range of $50.23 to $132.49
A current discount of 14.2% - 201.02%

7. As a consequence of the dramatic change in value in 2000 and 2001, R-squared (a measure of stability) is reported at 0.08, expected when measuring a "turnaround" company.

Respectfully yours,
The Drunken Scotsman
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