Friday, May 16, 2014

* J.C.Penney (JCP) - Earnings Postmortem, Cataclysm Avoided; Risk of Bankruptcy Drops. Turnaround or a Deflating Life Boat?

JCP is trading $9.56, up 14.2% with IV30™ down 28.0%. The Symbol Summary is included below.

Provided by Livevol

UPDATE: 5-21-2014

Provided by Livevol

The stock is up off one of the most highly anticipated earnings releases for any company in recent memory.  The facts in and of themselves were horrible.  The company is losing money at an atrocious rate.  But a stock price is the present value of all expected free cash flows, and the expectations have increased when the firm showed same store sales growth up 6.3%.

"The department store chain that's posted more than $2.5 billion in losses the past three years yesterday reported its first quarterly sales gain since 2011, Bloomberg reports."

Source: Why J.C. Penney (JCP) Stock Continues To Soar Today, written by Tedd Cohen.

More Facts
Q1 loss was $1.16 per share ($352 million) vs.$1.25 loss expected ($1.38 a year ago)
Q1 Sales +6.2% to $2.8 billion vs. $2.71 billion average estimate ($2.64 billion a year ago)
Q1 had the highest gross margin in each of the last four years
Sales remain $1.1 billion below Q1 2011
JCP secured a $2.5 billion credit line

So it's a beat on expectations, but in reality, this firm is literally hemorrhaging cash.  The other reality however, is that the firm has avoided the near-term catastrophe as there was a worry that suppliers would stop sending over merchandise in fears that they would never get paid.  That cataclysmic fear has been totally alleviated.

JCP is here to stay for a while, whether you want to invest in a stock (a stock) that represents the future prospects of a company that is, for lack of a better term, imploding, is a personal decision.

The Stock chart going back to 2004 is included below.

Provided by Charles Schwab optionsXpress

So an $85 stock is now trading below $10 and hit an all-time low of $4.90 earlier this year. But let's look at what the option market reads. The two-year IV30™ chart in isolation, below.

Provided by Livevol

This chart alone, regardless of stock price and the earnings numbers, tells us everything we need to know about the perceived risk in JCP stock in the near-term. And what is that perception? Low Solvency Risk.

Said differently, while we can quibble about the quality of investment the stock is, what we cannot quibble with is the fact that the new CEO has made it very clear that JCP will be a going concern for a number of more years (at least).  As I said prior, the cataclysm has been avoided, and believe me, it was close.

The Skew Tab snap (below) illustrates the vols by strike.

Provided by Livevol

It's nice to see a slightly parabolic skew, reflecting both upside and downside tail risk.  This is "abnormal" skew, and does reflect the slightest bit of optimism in the very near-term for JCP stock.

To read more about skew, what is and why it exists you can click the title below:
Understanding Option Skew -- What it is and Why it Exists.

Finally, the Options Tab is included below.

Provided by Livevol

Using the $10 strike, the option market reflects a price range of [$8.50, $11.50] for JCP through trading on Jun 20th.  And, I do note, although not pictured here, that the "disaster" puts (i.e. bankruptcy puts) in Jun have no bid.  So, in English, the risk of bankruptcy per the option market in the immediate term is essentially nil.

If we go out to Jan 2016, the risk of bankruptcy reflected by the option market is ~7% (the value of the $1 strike puts).

This is trade analysis, not a recommendation.

Legal Stuff:
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