JC Penney Co.’s (JCP) second-quarter results should benefit from the government’s $600 stimulus checks and markdowns on its merchandise. The management recently boosted its quarterly EPS guidance from $0.38 to $0.50. JC Penney is scheduled to report earnings on August 15.

We are increasing our EPS estimate by $0.12. However, we continue to believe the macro conditions that have negatively impacted consumer discretionary spending are not improving, and that will weigh on JC Penney’s results in the second half of the year.

All told, the shares are discounting continued weakness, but the headwinds affecting the consumer make it too early to get long the stock. We continue to recommend staying on the sidelines until conditions show signs of improving.

JCP shares currently trade at 11.4x our fiscal 2008 EPS estimate and 10.7x our fiscal 2009 EPS estimate. We think the stock is reasonably priced, given the negative headwinds facing the consumer. We estimate that JC Penney has normalized earnings of $4.20 per share. That is based on annual sales of $20 billion and an operating margin of 8%.

Based on those assumptions, JCP shares are trading at an attractive 7.5x normalized EPS. Even so, the difficult macro conditions make difficult to forecast when JC Penney will be able to achieve normalized earnings. As such, we remain neutral on the stock. Our six-month target price is $36, or 10.8x our fiscal 2009 EPS estimate.

Read the full analyst report on JCP

“JCP” Free Stock Analysis: Buy? Sell? Hold?
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