Others to Profit During J.C. Penney Turnaround: Analyst

A lot of retailers are going to profit as J.C. Penney continues its turnaround, Morgan Stanley analyst Michelle Clark told CNBC Thursday.

Penney [JCP  Loading...      ()   ] announced its new pricing strategy in January, as well as a plan to offer "stores within a store" and offer more exclusive goods from such brands as Martha Stewart, in whose company Penney bought a sizable stake.

CEO Ron Johnson told CNBC at that time the strategy is "the first key step in the transformation" of the retailer.

But in the short term, Clark said, other retailers across the board will be able to profit from Penney's transition.

"In the department store space, Macy’s will be a bigger beneficiary than Kohl's because they have a higher store overlap with J.C. Penney," Clark said. Macy’s [M  Loading...      ()   ] is "also executing from a product standpoint" because "Kohl's [KSS  Loading...      ()   ]

has not introduced enough new brands into its assortment."

In specialty retail, Gap's [GPS  Loading...      ()   ] Old Navy is likely to pick up market share, she continued, while Target [TGT  Loading...      ()   ] will benefit within the discount category. In the off-price sector TJX [TJX  Loading...      ()   ] and Ross Stores [ROST  Loading...      ()   ] will pick up  "J.C. Penney's price-conscious consumer."

"We also think the off-price retailers will pick up some of J.C. Penney's vendors as it looks to narrow down its vendor base," Clark said.

Expectations for Penney are high. Some analysts, including Piper Jaffrey's Jeff Klinefelter, believe Penney earnings won't see any "meaningful" bounce from the strategy until 2013.

At the same time, the bulls will point to Ron Johnson and J.C. Penney's management team as driving same-store sales growth this year, according to Morgan Stanley's Clark. She thinks the first-quarter earnings, due out in May, could disappoint.

"We think sales are underperforming expectations there," she said of Penney's. Macy's, by contrast, is gaining market share with its "exclusive brands and localization initiatives."

"It's one of the cheapest names" in the retail sector and "it's the one we would put money behind at current levels," she said.

Clark does not own shares of the companies but Morgan Stanley has received compensation for banking services at one or more of them.

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Some Banks in Denial on Deleveraging Impact: Analyst

French and German lenders are in denial over the impact of deleveraging and the need to raise capital, Chris Wheeler, bank analyst at Mediobanca, told CNBC.

Some of Europe's biggest banks reported steep losses on Thursday and their executives warned the weak economy is likely to impact earnings further.

“Banks have told us about these wonderful deleveraging programs and in many cases they made very good progress. The problem is they seem to give us very skinny numbers on what that means in terms of lost revenue,” Wheeler said.

Analysts at Morgan Stanley estimate that European banks [.SX7P  Loading...      ()   ] will reduce their balance sheet by between 1.5 trillion euros ($2 trillion) and 2.5 trillion euros during the next 18 to 24 months.

Wheeler believes that French and German banks should consider tapping the investing public for capital, instead of selling revenue-generating assets.

“Why trade in some assets you might like to keep, why give away revenues, rather than just go to the market,” Wheeler said. “If you have a strong equity story, like a Deutsche Bank, like a BNP Paribas, deal with the capital issue and take a rather more leisurely view about deleveraging your balance sheet.”

Wheeler believes that the next three-year long term refinancing operation (LTRO) by the European Central Bank will be crucial to getting banks back on a solid footing.

“It’s only three-year money but it’s a matter for the banks to try to get themselves sorted out in terms of longer-term funding needs,” he said, adding that the operation will not sap demand for bank debt.

“One of the good pieces of news in the LTRO is that you’re going to get into a situation where banks are seen as desperate to raise debt, therefore the ECB can be a bit more selective and have a little bit more time to get into the market and start to create a buoyant private market for bank debt again,” he said.

Disclosure:

Mediobanca has a neutral recommendation for the European banks sector and favors Italian and UK banks, specifically Banca Popolare di Milano, Intesa Sanpaolo, Banca Generali, Credito Emiliano, Barclays, Standard Chartered and HSBC.

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Focus on Stocks That Aren't That 'Sexy,' Analyst Says

The next year is likely to bring a period of tepid growth for businesses, and investors should stick to defensive plays even though they are not that sexy, Barry Dixon, head of research at Irish wealth management company Davy told CNBC.

Dixon urged investors to focus on companies with “strong fundamentals in terms of balance sheets, cash flows and that are essentially cheap (to run).”

He rejected suggestions that the stock prices of such firms tend to be high, urging investors to look at companies with strong fundamental positions in existing and emerging markets.

An example he gave a firm “not in the sexy end of the (stock sector) world”—Irish insulation producer Kingspan [KGP-GB  Loading...      ()   ] , which has gained strong market positions in the UK, US and Australia.

“Kingspan is a fantastic way of playing the green agenda; they’ve started from a small Irish company 30 years ago to being what is effectively a global player now on the insulation market,” he explained.

“There’s no global leader in insulation at the moment and it’s a hugely important area driven by regulation,” he added.

Dixon pointed to India as a growth market where insulation products are used to protect perishable items from heat. Rising energy costs in European markets have boosted insulation product sales as well.

Betting on Sport

Bookmakers could be a good bet for investors in 2012 due to a number of sporting events taking place over the summer, Dixon said.

UK- based bookmaker William Hill [WMH-GB  Loading...      ()   ] is particularly attractive due to significant investment in their online industry and relatively low overheads, Dixon explained.

“Everybody thinks that the retail bookies in the UK are dead, and they’re saying that 60 percent of their customer base is over the age of 40 so they’re literally dying off,” Dixon said.

However, he added that up to 50 percent of William Hill’s revenue comes from gambling machines, and betting on soccer was particularly popular among the 18-35 age group. With the World Cup and the European Soccer Championship tournaments taking place over the summer, bookmakers are likely to cash in.

“If you look at the demographics of the people who are playing the machines and are betting on (soccer), it’s the 18 to 35 year olds.. so the bookies are bringing back in that young demographic,” Dixon explained.

He added that William Hill shops made around £80,000 ($126,727) per year and less than £10,000 ($15,838) per year was spent on maintenance and investors could expect a cash flow yield of 10 percent.

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Disclosures:
Davy Wealth Management is long Kingspan; Davy Wealth Management is long William Hill

Disclaimer

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