J.C. Penney's (NYSE:JCP) stock price has languished near multi-year lows for some time now, but that may soon change. Shareholder activist Carl Icahn has now reportedly bought in.
On February 1, the Wall Street Journal reported that Carl Icahn may have taken a sizable stake in J.C. Penney. The article did not quantify how large a stake he may have taken, nor did it identify Icahn's reasoning behind the reported purchase. That said, if Icahn has indeed made a major purchase, it could be a boon for shareholders.
Icahn the Activist
Carl Icahn has a reputation for taking a common stock position in a company and then either pushing for board representation or trying to encourage an existing board to enhance shareholder value in some capacity. In fact, Icahn has made billions by such wheeling and dealing. (To learn more, see Activist Hedge Funds and Knowing Your Rights As A Shareholder.)
In 2007, Icahn sought influence in a number of ventures. He is rumored to have forced out Blockbuster's (NYSE:BBI) CEO John Antioco, after taking issue with Antioco's reported failure to acquire rival Hollywood Entertainment. And although he lost a bid to gain seats on Motorola's (NYSE:MOT) board in mid-2007, his involvement has placed much needed pressure on that company's board to find ways to enhance shareholder value. He also got himself elected to the board at homebuilder WCI Communities (NYSE:WCI). All of this was just in this past year! This says nothing of his past involvement in major organizations like Time Warner, where he reportedly pushed for that company's break up as a means of unlocking value.
Why is his past so important? There's no guarantee, but I would surmise based on his previous activist activity that he probably sees value in the down-and-out retailer and probably thinks he can to force the board unlock value for the common shareholder.
J.C. Penney's Qualities
Icahn's modus operandi has been to invest in companies that are struggling so that if and when his plans are enacted he stands a chance of reaping huge gains. Again, there's no guarantee that Icahn will take this same route with J.C. Penney, but I certainly think he would be intrigued by the waning share price. Icahn also seems to have a penchant for companies that have a long-established foothold in their businesses or that are industry leaders. For example, Motorola is among the industry leaders in cell phones, WCI Communities is a major player in Florida real estate, and Blockbuster remains the 800-lb gorilla in video rentals.
Along those same lines J.C. Penney has been active in retail since 1913. It's been through several recessions and a depression and has stood the test of time. Incidentally, I think that he also likes companies that have a broad reach or footprint, which J.C. Penney certainly has as well. It's a household name, and it has more than 1,000 stores scattered in 49 states.
J.C. Penney is engaged in a highly competitive industry that also happens to be struggling right now. The economic slowdown is taking a tole on retailers, yet J.C. Penney has been able to generate earnings and positive operational cash flow. Icahn seems to prefer companies that have the ability to operate in good times and in bad. On the flip side, J.C. Penney trades for just under 2.5-times book value which is much cheaper than the 7-times book value that rival Nordstrom (NYSE:JWN) currently trades for. (For more on the price-to-book ratio, see Value By The Book.)
The Bottom Line
Icahn may have taken a sizable stake in J.C. Penney. If Icahn has the same plans for the retail stalwart that he had with many of his past purchases, I think that it could turn out to be a net positive for J.C. Penney shareholders.