SubscribeStock Valuation - Sears in Focus
September 27, 2007
(Excerpt from The Disciplined Investor, pages 90-91 - See Inside the Book at Amazon)
There are several types of assets a company can own. Each business is different but all will have some combination of capital stock, land, some form of real estate, inventory, trucks and many other items of value. These assets will have differing abilities to create profits as well as levels of liquidity. Some assets are characterized as tangible while others may be considered use or even current.
As an example, inventory is usually very easy to convert to cash. Therefore it would be considered liquid. On the other end of the spectrum would be farmland and any other items that require a longer time to sell and, therefore, require much more time to liquidate. On the balance sheets, liquidity is important. It is differentiated by the terms current assets and non-current assets.
Another distinction that is considered is whether they are “real.” Remember that some assets, such as cash, are easily valued and liquidated. Then there are those that are much more difficult to pin a price on, such as farmland and buildings. Regardless, the fact is that you can actually touch and feel these, and they are therefore considered “tangible assets.” Beyond those assets that we can easily see, there are those that have significant value but are not quite as apparent. Goodwill, as an example, may include the value of a name brand or possibly a well-known company spokesperson. (Think of William Shatner and Priceline.com)
It takes a good eye to recognize the hidden values that may be found on the balance sheet. For instance, take as a good example Sears. For years, they were valued according to generally accepted accounting principles (GAAP) as well as traditional investment valuation techniques. It was only recently that the idea of valuing Sears to include their significant real estate holdings was introduced. This occurred as analysts realized that they have tremendous unrealized value in their land holdings. During 2004-2006, Sears’ stock shot up as investors wanted to own them as a real estate play, in addition to their ability to create revenue from the sale of washers and dryers. (end of excerpt)
The idea that Sears (SHLD) could be a real estate play had pushed investors to buy up shares in late 2004, pushing towards $190 in mid 2007. The move was from a long-term base in the $40-$50 range. Now, the stock is hovering around $130 and the same force that pushed it higher have brought out the skeptics who believe that the significant real estate holdings could further erode the price of the shares. (not to mention that it is essential a hedge fund now)
The 30% move down for the stock since the high in mid-may appears to be a result of
the announcements of lackluster earnings and the realization that forward earnings will come under pressure because of lower consumer demand. In fact, it was only a few weeks ago that Sears announced a 40% reduction of profits : “Our gross margins came under pressure from sales declines and increased promotional activity, and as a result, our net income was significantly below last year and our expectations,” Chief Executive and President Aylwin Lewis said in a statement August 20th, 2007. (and similar statement in quarters past)
So, what about the real estate holdings? Do we look to write down the stock value in the same way as we need to for all other real estate plays that had the same increase during the boom of 2004-2007? If we look to unwind the value of the real estate (Estimated at $15 billion) from the company price, we could extrapolated that from the Market Cap of $18 billion, the shares are still trading at a significantly high multiple considering that the fact that the retailer is bleeding heavily. If we just look at the real estate, then we are hit with the concern over valuation.
Add both of these to the mix and unless Edward Lampert has some more magic up his sleeves, then this is going to flounder…AT BEST! Until they can get a handle on the paltry margin problem (shrinking as we speak) and the realization that the land value is only good if they sell (which they are not) then there is no reason to own this stock.
Will a mystery buyer come out of the woodwork and offer a premium? Probably not as there is a substantial premium already built in this in the form of the real estate value/multiple. This is clearly not the type of position that a Disciplined Investor would buy or hold today as there is many problems concerning the ability to properly value the shares.
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14 Responses to “Stock Valuation - Sears in Focus”
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Your $15 billion valuation of the real estate is on the low-end, but not too far off. The rest of your analysis is incomplete. Let me help you– you forgot the following items:
1. $10 billion in Inventory and $3.5 billion in Accounts Payable (a net winner in liquidation).
2. A roughly $2 billion stake in Sears Canada.
3. A contract with rights to a stake in Sears Mexico (has some value– pick your amount).
4. The remaining stake in Orchard Hardware (somewhere in the $500 million range).
5. The intangible Exclusivity agreements (some have been securitized) with Kenmore, Craftsmen, Diehard, etc. Some have valued this as high as $10 billion in value. Let’s be conservative– $3 - $5 billion in value in my book.
As you can clearly see, you forgot a few hard assets that would also find buyers in a liquidation scenario. Add it all up, and you get $25 - $30 billion in Value. The shares are trading at only $18 billion. Do the math– they are undervalued!
As for your short-biased comment about the retailer “bleeding heavily,” please explain. Even in a nasty cyclical downturn they are going to generate over $1 billion in Free Cash Flow in 2007. They have been profitable in every quarter with Eddie at the helm (yes, even in the days of Kmart only).
It appears that you are a chart-reader (and possibly a tarrot-card reader) trying to legitimize your short position with a small dose of what sounds like real “fundamental analysis.” However, your numbers are incomplete at best.
Possibly in the future if you are planning to write a blog, you could garner more respect if you eliminated spelling and punctuation errors (”mid-may,” comments in parenthesis after a period that ends a sentence, “we could extrapolated that,” “land value is only good of they sell”).
Also in the future, please clearly state your short position so as not to throw off less naive readers who may not be aware of all of the hard asset values you left out.
Full disclosure– I am long the shares from an average cost of $100.46. Good luck to you and the rest of the shorts out there!
Thanks… Disclosure. We are not short… Nor Long. Good try though. Picking on the punctuation is a bit of a stretch trying to discredit. I alwoays (is that speleed right?) wonder about the personal attacks that focus on the commas. It is the content as a whole..
Anyway, you obviously know something that the rest I have read and seen do not and more about the stock than I; so, no need to explain post to you. Surely hit a sore spot and sorry that the latest drubbing of the shares hurt. I ask only one thing: Please do your homework and do not talk out of the wrong.
I will correct the of to if and still maintain that this stock is not one I would want to put $ into at this time. (AGAIN- NOR SHORT - Just plainly neutral)
You are correct in saying that you hit a sore spot with the latest drubbing. It has been frustrating, although given what’s going on in housing, I guess I can understand Wall Street’s short-sighted ways.
The sore spot comes from not only losing money but reading incomplete analyses of the stock, mostly from shorts. They read similar to yours with themes like: “the real estate is only worth ‘x’ (some low-ball number),” “sales keep declining,” or “who will buy their real estate in this bad market?”
I just get tired of the headline-readers who keep stating that the “world is ending.” No it isn’t!
These are the times to hang in there and buy if you have the cash. It is always darkest before dawn. I continue to own the shares and will for the next 10-15 years. After Eddie posts 15-20% annualized returns with the stock, everyone will look back and regret being shaken out at $130 back in 2007.
More full disclosure– I owned the shares before the bald idiot on TV started pumping it; before his show even existed! I do my own due diligence and would never exclusively listen to him, a blog, an analyst, or any other supposed expert in this game. I recommend that anyone reading this blog to do the same and reach your own conclusions.
I aggree with chris- there was a LOT missing in this analysis. I also think it is funny how many people loved this stock when it was expensive, and hate it now that it is cheap.
Chris:
I agree that you should not get your analyses (spelling is wrong on your latest post so I thought I would point out…as you say: “you could garner more respect if you eliminated spelling and punctuation errors”.
The fact is that we do a complete effort and analysis and only the summary (for time and for the sake of the clients that actually pay us to do this type of work for them) for the blog posts. I am sure you understand….
As for the final line in your last comment, I agree with the idea that you should do your own research and come to your on conclusions. Although I do not wish to call anyone, no even you, an idiot for expressing their opinion. I left in your rude remarks as commented but would ask you to please refrain from being personal. One more thought… If you knew so much about this stock, why didn’t you sell at $180, or $170 or $160, or even $150. Maybe at $130? Greed is a terrible thing and a few lessons on risk management would do you a world of good…
Speaking of spelling errors, I believe that it is Tarot, not tarrot. Chris, if you’re going to harangue someone for their spelling and, in doing so, question their intellectual prowess, please make sure you use a spellchecker or dictionary first. Just a suggestion…
Having paid my way through college, in part, by working at K-mart, I can’t see how anyone, even someone as respected as Eddie Lampert, could see the wisdom of combining Sears and K-mart. These two companies were very different from each other in terms of product, clientele and culture. In addition, they were also both doing poorly in their respective markets. In mathematics, two negatives may make a positive, but the retail business is a bit different. From both of the analyses I read, it appears that the only way to unlock value from this combined entity would be to sell off the parts. However, as a going concern in its present state, it doesn’t look very attractive.
Full disclosure: I did work at K-mart and have nothing but good things to say about the people I worked with there. However, even back then (late 80’s-early 90’s), it was obvious that Wal-Mart and Target (and even Richway) would kick our rear. I also don’t own any Sears shares.
I worked at Sears in the late 1960’s, early 1970’s as a buyer in the catalog operations. At that time Sears was beginning it’s long good bye with it’s long-standing catalog by consolidating its buyers from the Boston plant to the Philadelphia plant. Soon thereafter, other consolidations were made with their other 10 or so plants around the country. By the late 1980’s, some of these plants were closed, and a few years later, the catalog was history.
The point is, these catalog operations had been losing money since the early 1970’s and still represented a large minority of its annual sales. It took 20 years for Sears to finally shed its losing catalog operations, yet Sears managed to survive with its Allstate operations and its Dean Witter and Discover acquisitions, to go along with its retail business. Sears had good years and bad years in the stock market during this period.
Then they decided to spin off the Allstate and a few years later the Dean Witter Discover subsidiaries. The shareholders made a killing in the years following as both of these now separate companies were market favorites.
Then we had the KMart merger and Eddie Lampert. Which brings us to today. Sears has had a long history of making the right moves at the right times (maybe with the exception of putting Dean Witter brokerages in Sears stores for a short time-stocks and socks didn’t work). Some of their moves may take one or two decades to finally be resolved, but in the end the Company and its shareholders have survived and profited nicely. In the long run, I’ll take that track record.
By the way, my late father worked as a stockman in the Boston plant for 39 years, retiring in 1987, and never having made more than $25-30,000/year. Yet when he retired his Sears profit sharing and pension plans were worth over $300,000. He benefited from 2-1,3-1 and even a 4-1 split back in his earlier years there. Granted that no ordinary workers there today will achieve what he did, but I maintain that the future is still bright at Sears, and that the management will find ways to right the ship and make strategic acquisitions in the Dean Witter mold.
Now the stock is far below when I first write this post. Yes, it did move up with the markets right after this appeared, but not for long.
I believe that when we think about ideas that stretch beyond one day or even one week, we should more patient.
Ron,
I think the idea of looking that far back at the company’s “track record” to come to a conclusion about its future is kind of shaky (or is it shakey — this spelling thing has me scared!) Both Sears and the world it functions in and competes in have changed too much. I don’t claim to have any idea how it will work out, I am just suggesting that particular analogy is weak.
Tuesday, June 24, 2008
John Marcenek
PO Box 942, Cocoa, Florida 32923
Telephone: (321) 890-6565 E-mail: jmarcenek@yahoo.com
RE:
Sears Holdings Corporation
3333 Beverly Road
Hoffman Estates, IL 60179
(847) 286-2500
To whom it may concern:
As of yesterday, I worked in Sears store 1175 in Merritt Island, Florida. I have been employed by Sears for about a year and a half. Last year, I was given an award for the most protection agreements sold for Home Improvement (including tools, hardware, lawn/garden and patio, and sporting goods). I put division six (sporting goods) into the number one spot for protection agreement sales for the first time ever in this store’s history. About two weeks ago, I was wondering how two salespeople in the tool department managed to raise their protection agreement sales numbers seemingly within a few weeks. One night, while closing solo in the tool department, I noticed about a half-inch stack of coupons stacked on the side of registers 531 and 532. Registers automatically print three to four coupons on each sale. Most customers leave them on the counter and tell us to give them to someone who might need one.
Up until this point, I was just crumpling them up and throwing them in the trash can. I realized the sales people in tools were doing the opposite; they were saving them and using them to get sales. I asked Frank King about it the next day and he said that was in fact what he was doing, he gives them to customers and others that are hesitant about buying a protection agreement. I thought this was brilliant. I started saving ones that customers did not want for sporting goods and lawn/garden. Over the next week, I used two that I can remember. Both were similar sales, one a tractor, and one a treadmill. Both customers were hesitant about buying the product AND a protection agreement. For example, on the tractor sale, I offered him a $25 coupon that another customer left if he bought both the tractor and the $300 protection agreement. He instantly came onto the YES side of the fence; he was no longer hesitant and said yes. Therefore, in effect, I got the company and myself a protection agreement sale that no one would have had if a previous customer did not leave the coupon on the counter and I offered it to this customer. It helped close the sale, close the package deal. For illustration purposes, say half the coupon came off the tractor and half off the protection agreement, we (the company and myself) got 287.50 from a coupon discounted $300 protection agreement. We would not have gotten that sale, that money, if a previous customer did not leave the coupon on the counter and I offered it to this customer.
Yesterday… Monday June 24, 2008, Anthony, the store’s loss prevention manager, called me into his office asking me if I liked my job, how long I had been working there. I stated yes and a year and a half. He said let’s talk coupons. He asked why I was offering customer’s coupons. I told him because the register prints them on every sale. He said it was against company policy and I was violating company policy. I must admit, I was thoroughly confused about this as 1) The company’s own registers printed the coupons with every sale and 2) It helped increase revenue for the store, the company, and me by increasing sales. 3) If the customer was not offered the coupon, they WOULD NOT BUY the protection agreement; if they were offered the coupon, they WOULD BUY the protection agreement. 4) If offered the coupon, everyone wins… the customer, the store, the company, and me. How could this be wrong? Nothing appeared underhanded about it to me. Anthony stated I was offering unauthorized discounts and that it was a violation of company policy. He made me sign a statement that I understood this and would not do it again. I was not aware this was a violation of company policy and I agreed to what he wanted and signed the statement.
After going home, I called a Sears Human Resources consultant at the associate service center for advice on this (888-88S-ears, case number 6067037). The woman told me while she understands both points of view… Anthony’s and mine; it is actually a violation of company policy and I should not offer the coupons to customers again. I agreed.
Today I came into work at 1:00 PM. At about 3:30, I was called to Claudia’s office, the store manager. Anthony and Claudia were in the office. Anthony told me that he escalated his report on me to the associate service center and it has been decided that I would be terminated because I offered unauthorized discounts to customers.
I went home and called a Sears Human Resources consultant at the associate service center for advice again. I told her how this is wrong from so many angles as 1) Anthony violated company policy by only allowing 4 hours work time between warning me about the violation and terminating me. I offered no coupons to customers in that four-hour time span. 2) No opportunity was given to show that I stopped any company violation. I was warned then terminated, a violation of company policy. 3) Anthony could not provide me anything in writing showing this was a company policy violation. 4) This all opens the company up to possible wrongful termination lawsuits. 5) None of the other sales people in the tool department also using the coupons in the same way, the sales people I learned this from, were terminated. 6) As previously explained above, this results in loss of sales and revenue for the company (I am sure company stockholders would not like any of this). She replied that it is still a violation of company policy to offer these coupons to customers because I am not authorized to give them and that my termination would stand. I told her how flabbergasted I was that the company was willing to lose sales and employees over this.
Later, after speaking with a paralegal friend, I called a Sears Human Resources consultant at the associate service center for advice on this (888-88S-ears, case number 6067037) again. This time, I received an answering machine at which point I stated that it is not true I am not authorized to give these coupons. If it were true what she said that only management were authorized to use the coupons, the coupons would not print out at the register; they would be e-mailed or faxed to managers. The mere fact that the company has them set to automatically print with every sale at the register authorizes me to use them. If the sales people are not authorized to use them, then why do they print at the register with each sale? I looked through ALL the Sears employee paperwork given to me, there is nothing regarding how these coupons are to be used, and I do not recall any paperwork I was asked to sign over my time there stating the same. As of June 25th at 11:30 AM when I am writing this, I have received no reply to the issues or points I raised above.
I believe in this company. I would like to see it survive. But policies and decisions like the above leave you wondering and your head spinning. In conclusion, I am almost sure that Sears’ investors, stockholders, and executive management would not be happy with any issues raised here.
Respectfully,
John Marcenek
Terminated Sears Store Employee
As I somewhat agree with your comments about your termination, I have to agree with the company on your termination. Offering discounts, not authorized, is a violation of company policies. These coupons are printed out for the customers that make the purchases for “repeat” buisness, of that customer. In other words, its a “thank you”. If those customers “gave” the coupons to others, that would be fine. You keeping them and give them out, would be stealing from the company and the customer.
Which brings to a point, that I have made purchases and have had to ask for the printed coupons from the register. Most customers will not ask. Is that where you got them??? Not telling the customers??? Again, clear case of stealing!!! You should had not been terminated, but charges should had been brought.
It just like foolish government rule concerning coin transaction,and how the institutions misinterpet them. I took 20.00 cash from atm machine. went into
the bank and asked to change it into 2 rolls of quarters. I was informed that according to gov. regs I needed to fill out my lifes information so they would
be sure i was not money laundrying well that broke the camels back and
told them they were totally wrong. and then left and went to wash my clothes.
lucky i was the laundromat had quarters.
UPDATE: 9/25/2008
You agree? You must be in Sears management. That is why Sears is failing as a retailer.
It is mandatory for the state of Florida’s unemployment office to conduct an investigation on terminations. They did… and found no wrong doing on my part. I was awarded benefits charged to Sears account. Sears appealed recently. I did not attend the telephone appeal because apparently Sprint had some sort of setting on my cell phone not allowing calls while it checked my e-mail. Needless to say, I didn’t attend. The result came two days ago… Sears appeal was rejected… again… I did nothing wrong or against any company policy. The original decision stands. I imagine they will appeal again, but they will lose again.
Any one know a wrongful termination attorney that might like to take on this case in a “right to work” state such as Florida?
Thanks,
John