Reader Justin submits: Why Sears (SHLD) is NOT going bankrupt?
In this volatile market, anyone can say anything to put downward pressure on a stock. In many cases deserved, in some cases absurd, and in the case of Sears a little of both.
Let’s start with the deserved part. Obviously, retail is doing terrible this year as an investment. However, the woes at Sears go beyond the macro environment. They have made bad decisions in some cases, suffered from management turnover, and communicated very little beyond what’s required by a public company. On top of that, they recently lost a well-respected, activist shareholder, Bill Ackman. Bill has taken an absolute beating on his investments in Sears, Target, and Borders, so he may have had about all the fun he can handle in retail. In short, it hasn’t been all that pretty, but the shares reflect much worse.
The absurd is the idea that Sears has some kind of solvency risk as some have floated. Why is this absurd? Here’s my case:
1. Last quarter Sears generated FCF (free cash flow) of over $400 million. Target, a “good” retailer actually had no FCF last quarter, they burned over $900million. In fact, Target hasn’t generated FCF in the last 3 quarters. Over the same time frame Sears generated a staggering $1.5 BILLION in FCF. So yes Sears is making money hand over fist in this environment even with mediocre execution.
2. Eddie Lampert’s investment fund ESL owns over 50% of Sears. And Sears makes up over ½ his fund. And his fund is still making investments in other equities. Now if you are thinking that ½ your fund may evaporate into insolvency or you are worried about investor redemptions then you preserve cash if not generate cash by selling positions. What you don’t do is make more investments, which is what he’s doing.
3. Sears announced the purchase of additional shares of Sears Canada in November. Why spend your cash on buybacks and now additional shares in Sears Canada if you are worried about your cash position?
4. I’ve been to several Sears and Kmarts in recent weeks and they are all hiring.
In conclusion, Sears is hiring people, buying shares in, generating FCF, and ESL continues to make investments. None of these indicate to me that there’s any solvency concern by the controlling shareholder.
Disclosure (“none” means no position):Justin is long SHLD
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15 replies on “Sears…A Reader Submission.”
Very informative.
The stock price at this level is very good and now what we need is some sort of catalyst like a merger of some kind to take away the focus on just Sears and Kmart stores. Tired of hearing they are ugly looking.
I also want to add that Citigroup stock is being bought by Keebler and Ican and has been added to managers that already hold the position.
Also Carlos Slim just bought 25 million shares of Citigroup.
HAPPY HOLIDAYS
There is more money to go around now than ever. Lenders are being bailed out, which means a bailout for borrowers. You would be surprised at how many 0% loans, grants, and funding is going around.
Bailouts for Everyone
Just a correction Carlos Slim bought 26 million shares of Citigroup – BLOOMBERG NEWS
Also, I forgot to mention Eddie Lampert owns 19 million shares of Citigroup.
You gotta love it.
SHLD will not go out of business. That’s a given. Your analysis is correct, but you evaluate retailers based upon operating cash flow and EBITDA, not free cash flow and in this regard, SHLD still lags significantly.
Their ROIC is poor which is why ESL continues to cut capital spending. EBITDA trails best in class competitors by 4%. And margins continue to decline. It’s a virtuous cycle… less capital spending, less income, less profit – and that’s what you’re seeing now.
The coming quarter and earnings will be very telling. But no, the company is not going bankrupt… the better question is whether its a good investment relative to peers (opportunity cost). The market is that saying even with a $4B market cap, better returns are found elsewhere (see Ackman, Bill).
–James Bilson
Still think all the buying in Sears Canada is a dividend play. As I understand it, SHLD can’t get their hands on the Canadian cash without Sears Canada declaring a dividend.
joe,
you sure? shld accounts for the cash on it balance sheet under “cash and short term investments”. if they had no access to it, would they be able to account for it like that?
I’m not 100% sure, but I’ve always been confused by the separation of cash in the financial reports. And after the sale of the Canadian division credit card business in 2005, Sears Canadian issued a huge dividend which passed $877 million to SHLD (which at that time held 54% of Sears Canada). It’s in the 3-15-2006 10K for SHLD.
We have to look at it like this. Finally closing underperforming stores is a positive in a way.
Then we have to look at why the Autozone and Autonation purchases it seems there might be a merger with Sears.If that happens you know the Die Hard battery will be sold and installed in all their cars and sold in their stores,etc.
If the merger occurs nio need to focus on just Sears and Kmart and it will be good to see Sears products sold in other sores,,,Home Depot,etc.
Let see what Lampert has in mind.
RECENT NEW PURCHASES OF CITIGROUP
PRINCE WAEED – UPPED ANOTHER 1 PERCENT T0 5 PERCENT OF SHARES
ICAHN – 800,000 SHARES
CARLOS SLIM – 26,000,000 SHARES
HEEBNER – 27,210,500 SHARES
I think we are getting a little squeeze from Sears today,,what do you think Todd.
msf,
rising tide lifts all boars..
Does that mean your expecting a mess when Sears earnings are realeased.
based on everything else i have seen from other retailers i would not expect good news…
that should have been “lifts all boats ” btw
Thank you for that correction I thought you were on acid or something.
We have to say at this moment we are in no hurry to buy more shares of Sears.