Morgan Stanley Maintains Underweight on J.C. Penney (JCP)

Morgan Stanley is out with its report today on J.C. Penney JCP, maintaining Underweight. In a note to clients, Morgan Stanley writes, "We think investors will increasingly question JCP's ability to deliver i) +5% comp store sales and ii) flat gross margins in 2011 following weak April sales and 1Q earnings - both of which are necessary to move the shares higher, in our view, w/ the stock trading at over 16x P/E 2011e (vs. peers at 12.5x). While 1Q EPS should be inline w/ expectations (the co. updated guidance on 5/5), we think quality of earnings may be an issue (report date 5/16). We forecast a gross margin miss in 1Q (MS est. -100 bps vs. cons. -71 bps), and we think it's likely inventory growth outpaced sales growth during the qtr (a neg. for 2Q gross margins). Lastly, across the dept store group, JCP has the highest store exposure to weak payroll/guzzle mkts, a neg. for top-line growth." Shares of JCP closed Monday at $36.89.