Last year, CS estimated the real estate value of SHLD at $4+ billion (4x listed book for these assets). This struck me as unlikely (and I’m long the stock). Besides than the name and credibility of Credit Swisse, there was little to support the assertion in the reporting of that figure by the Wall Street Journal. So, I cut that figure in half and came up with a value of $104 per share (at that time). Since then, the market has tanked, retail has suffered (and continues to do so), and retail real estate is suspect and worsening (a comfort for shorts, a worry for longs, and a problem that increases the uncertainties for both). Well, I just came across a more in-depth analysis of the real estate value that provides the assumptions and valuations at various prices per square foot, and, at $25/sq ft, the $2 billion estimate seems reasonable, even if marginally conservative.
Here is the reference: http://www.manualofideas.com/files/shld_moi_20081223.pdf
This provides a further margin of safety for SHLD investors. The company now sells at just 58 percent of net asset value, and posts a discounted-cash-flow intrinsic-value of $118 per share (if assuming no growth over the next decade, 5 percent growth in the second decade, a discount rate of 15 percent, and continuing value of current shareholder’s equity). At today’s price of $44.36, its accumulted shareholder’s equity is 171 percent greater than its stock price.
There are some worrisome items for the stock in this environment, however. Free cash flows cover just 10 percent of current liabilities (less than half the ideal per Benjamin Graham). The Altman Z (at 2.63) remains well above the 70 percent likelihood of bankruptcy mark but is now firmly in the gray zone (between 1.81 and 3.00). Thus, closely monitoring the company’s future performance and financial strength is even more warranted. If sustaining owner’s earnings, the stock yields 17 percent, but maintaining owner’s earnings at this level seems questionable in the current market. If that falls below, 10 percent, the investor is best advised to consider other options, since the return fails to compensate for even normal market risk.
Nevertheless, for those currently owning SHLD, a hold seems warranted. As for new investors (i.e., those new to the stock), I’d recommend waiting for the market to evidence improving strength. Personally, I am holding and not adding to my position. More importantly, I am not hedging this position by selling covered calls, buying puts, or purhasing a short-retail ETF. In other words, I’m a semi-naked long — with my non-margined flag of peace waiving in the breeze on this one.
January 14, 2009
Robert Crawford
rcrawford.wordpress.com
Here is the reference: http://www.manualofideas.com/files/shld_moi_20081223.pdf
This provides a further margin of safety for SHLD investors. The company now sells at just 58 percent of net asset value, and posts a discounted-cash-flow intrinsic-value of $118 per share (if assuming no growth over the next decade, 5 percent growth in the second decade, a discount rate of 15 percent, and continuing value of current shareholder’s equity). At today’s price of $44.36, its accumulted shareholder’s equity is 171 percent greater than its stock price.
There are some worrisome items for the stock in this environment, however. Free cash flows cover just 10 percent of current liabilities (less than half the ideal per Benjamin Graham). The Altman Z (at 2.63) remains well above the 70 percent likelihood of bankruptcy mark but is now firmly in the gray zone (between 1.81 and 3.00). Thus, closely monitoring the company’s future performance and financial strength is even more warranted. If sustaining owner’s earnings, the stock yields 17 percent, but maintaining owner’s earnings at this level seems questionable in the current market. If that falls below, 10 percent, the investor is best advised to consider other options, since the return fails to compensate for even normal market risk.
Nevertheless, for those currently owning SHLD, a hold seems warranted. As for new investors (i.e., those new to the stock), I’d recommend waiting for the market to evidence improving strength. Personally, I am holding and not adding to my position. More importantly, I am not hedging this position by selling covered calls, buying puts, or purhasing a short-retail ETF. In other words, I’m a semi-naked long — with my non-margined flag of peace waiving in the breeze on this one.
January 14, 2009
Robert Crawford
rcrawford.wordpress.com
