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Who Will Go Bankrupt First — JCP or Sears?

JCPenneyJCPenney (JCP) and Sears Holdings (SHLD) are both doomed retail stocks.

To some, the only question is which will go bankrupt and wipe out investors first — JCP or SHLD.

Sears is losing hundreds of millions of dollars each quarter, with SHLD down about 50% from 2010 highs even after the recent short squeeze that sent the stock soaring from $40 to $60 on the continued hopes of “unlocking value” in its real estate holdings.

As for JCPenney, the stock is down 70% from its 2012 high built on Ron Johnson optimism. The former Apple (AAPL) retail exec failed and has now become the former JCPenney exec, and shares continue to slump with his predecessor Mike Ullman back in the saddle despite his previous stint, when he basically ran JCP into the ground.

Which one is worse? Well, it’s hard to say.

Both JCP and SHLD are expected to bleed serious red ink all of this fiscal year and even across the next two fiscal years.

Both JCP and SHLD have an abysmal CCC+ rating from S&P, deep in junk territory and described as “Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.” Not pleasant.

So how likely is bankruptcy? Well, let’s look at each pick separately.

First, JCPenney. JCP has $5.8 billion in total debt and total liabilities of $9.3 billion vs. a market cap just under $3 billion. Fortunately, however, total assets are $11.6 billion (presuming they were valued correctly at the end of last quarter) so the math shows that selling the company for parts tomorrow could pay all the outstanding bills. With almost 25% more in assets than obligations, there’s plenty of wiggle room, too.

But talk of credit drying up for JCP in August is a real threat. Obviously, the financing games to keep the lights on and restructure the business only work so long as the banks are willing to play ball. JCPenney could be one bad headline away from a credit freeze and a bunch of bounced checks.

Sears is in a similar position but slightly better position. Total debts are $3.7 billion and liabilities are $16.9 billion. With a market capitalization of about $6.3 billion, SHLD has less debt than its market value — something JCP can’t claim — and liabilities that are less than 3x market cap vs. more than 3x for Penney.

The real difference, however, is in total assets that top $19.3 billion — almost 14% above its outstanding obligations. That’s a slimmer margin than JCP but still a favorable one.

So when it comes to the question of bankruptcy for Sears or JCPenney, which is driven almost wholly by lenders who think it’s the only way to get paid, there is clearly no imminent threat. As long as JCP and SHLD are worth more than their obligations, they will continue to operate as usual.

But the important thing for investors to note is that with continued cash bleed at both companies, the weight of debt service thanks to a poor credit rating and the overall consumer trend that has resulted in slumping sales for these department stores … well, the losses will keep mounting and we might not be far removed from liabilities overwhelming assets at SHLD or JCP.

Neither will be going bankrupt anytime soon, barring a turn of very bad luck in the short-term, but given the trend, it’s likely that either or both could face serious solvency questions as early as next year.

Related Reading on SHLD and JCP

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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