Justin Siegel writes:
Sears (SHLD) is a Blue Light Special!
When I look for investment opportunities, I look primarily for 3 things:
1. Management
1. Are they aligned with shareholders?
2. Are they smart, proven?
3. Do they run the business like an owner?
2. Business
1. Is it a good business?
2. Is it easy to understand, for me at least?
3. Valuation
1. How much do I think it’s worth and how much below that value is it selling for?
How does Sears stack up?
1. Management
1. Effectively Eddie Lampert through his hedge fund, ESL, controls Sears, through a majority stake of common shares. In short, he’s staked his personal fortune, his hedge funds fortune, his reputation, etc. on the Sears common shares, which by the way represent the majority investment of his hedge fund portfolio.
2. Yes, Eddie Lampert is smart. Ivy league graduate, self-made billionaire, etc. Is he proven? He has racked up decades of 20%+ returns, so he’s a proven investor. Even a proven retail investor, but not necessarily a proven operator. A yellow flag in my opinion.
2. Business
1. Retail is a decent business. Not rocket science.
2. Retail is easy to understand, though Sears has many facets, which I think are often overlooked, or at least currently by the market.
3. Valuation
1. The short answer is I think Sears is worth A LOT more than $8 billion dollars. Why? Well, here are some of the juiciest parts:
1. Brands – Kenmore, Craftsman, LandsEnd, Diehard, and even Sears itself have very solid brand equity. Even after years of being ignored and poorly run, these brands are respected and valued throughout North America.
2. LandsEnd – Beyond the brand, this is a good business in its own right that has been churning out record years with one of the highest converting retail websites in the country. Sears bought it a few years back for shy of $2 billion. Probably worth at least that much.
3. 70% stake in Sears Canada, which has been doing very well.
4. Cash – $1.5 billion last quarter on its balance sheet
5. Sears.com – one of the largest, fastest growing, and improved websites of any major retailer. Still work to be done, but improvements galore.
6. Servicing network – Largest appliance and lawn equipment repair service in the country. I like a business where they sell you the washer and dryer once, and then get paid to maintain and repair to too.
7. Eddie Lampert – You get one of the world’s best capital allocators for free. Over time this will matter significantly, as it does in all businesses.
8. Real Estate – This frankly is the least interesting asset to me because it only becomes valuable if the rest of the business is failing, which it isn’t. Sears is profitable on a reported earnings and cash flow basis. However, Sears does own somewhere between $7-$20 billion in real estate depending upon who you believe.
And as a kicker, today you can buy Sears for LESS than Bill Ackman, Monish Pabrai, Bruce Fairholme, Bill Miller, and several other brilliant investors. It’s tied to the economy like everything and everyone, so it may not being going anywhere fast, but… What are some potential catalysts? Eddie Lampert making a great acquisition, earnings surprise, faster economic recovery. I think it’s a Blue Light special, but it’s up to you to cast your own votes.
Disclosure (“none” means no position):Justin is Long SHLD
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3 replies on “Sears Holdings "On Sale"”
Well, right now you can pretty much buy any stock that any “guru” has invested in for less than the guru paid for it.
Credit Suisse earlier this year valued SHLD CRE at $4.7 Billion and it’s fair to say it hasn’t gone up in value since then, so the $7-20 Billion range seems suspect.
Lands End is the premier brand in a breakup. I’ve grown more circumspect about the value of the other brands because Sears steadily loses marketshare and their customer base skews heavily towards old people. Not sure it makes much sense for a Lowe’s or HD to shell cash for those brands.
I could see some combination of Sears Automotive and AutoZone making sense.
Now on to the 3 business segments
KMart–Virtually no value and in fact probably has reached the point of being cash flow negative. Extending the Sears brands into KMart hasn’t done a bit of good for KMart or the brands. Does Eddie swallow his pride and shut it down?
Domestic Sears–Home of the Brands and home of whatever RE value the company has. Dying a slow steady death but probably will provide some cashflow for a few more years.
Sears Canada–every 10-K and Q always emphasized that the improvement in revenue, margin, and cashflow all had to do with the exchange rate as the Loonie rose vs the dollar. Now, with the Loonie reversing course, all those numbers will head back down. Plus, Canada is in the process of having their housing bubble pop and they will follow the US into recession.
Overall, cashflow and profits have been collapsing for SHLD for several quarters and there’s no reason that won’t continue for the foreseeable future. SHLD is just a dog of a retailer.
Having said that, you’d think SHLD has enough odds and ends laying around to justify a valuation above $8 billion (or 7.5 Billion). The trick is keeping the patient alive until somebody can pay for those odds and ends.
great article… great comment…
Joe, thanks for your comment, which brings up some fair points. However, I’m personally MUCH more suspect of Credit Suisse, or any analyst frankly, then self-made billionaire Eddie Lampert. Lampert could probably buy CS for cash 🙂
Another point I would raise is that the most recent analyst note I read this past month suggested Sears is actually gaining market share in appliances in addition to consumer electronics, halting a multi-year slide.
But here’s the easiest point to make, Eddie Lampert continues to buyback shares hand over FIST! He’s been buying shares from $170 down to $60 and will continue to do so. So the simple question becomes did Eddie Lampert suddenly become a bad capital allocator or do longterm value generating plans take a while to unfold, in particular during an awful economic climate?
If you think Lampert and all fellow investors suddenly got dumb, then you shouldn’t own the shares and stick with the CS analysts. But don’t you ever wonder what analysts would have written about a dying textile company, ie Berkshire Hathaway?