The shares of Sears Holding (SHLD, Financial) were weak yesterday (-5%) on a huge downward revision for earnings in Q4 for FY07. The company is now looking for earnings of $5.13 to $5.96 vs. analysts' consensus of $6.64.
I have seen a lot of commentary about this development and I think a lot of it misses the point. Some thoughts:
1) The retail environment is challenging right now. With all the concern about the housing market, high gas prices, the over-leveraged consumer and the threat of recession, it is no surprise that the consumer may be scaling back a bit.
2) Sears is a retailer. With both the Sears and K-mart brands, SHLD is subject to the ebbs and flows of the retail marketplace. It would be surprising if SHLD could do much better than the average retailer in this environment. That said, the announcement was a surprise to me and obviously others who follow the stock.
3) Sears may or may not need a make over. A compelling article in the WSJ contends that Sears needs to make massive changes to compete in the "brave new world" of discount retailing. When has discount retailing ever been an easy business to be in?? I think that IF Sears needs big changes, I would rather have some like Mr. Lampert at the helm rather than someone who has only been in retailing his or her entire career.
4) Valuation is very cheap now, but the upside is hard to measure. Some people were looking at SHLD as an asset play with all of its real estate. That way of valuing the company may not make much sense right now, but the real estate is not going away. I suspect that the current EPS estimates will represent something close to trough earnings and so we may not expect a premium multiple on them. If the company could earn $9.00 per share again (the result for FY06), what would the stock be worth? The company was buying back stock at $131 based on expected earnings of $7-8 or so. I think the shares could eventually move into that range again, but it's hard to say for sure at this point.
5) Stay with Lampert. Okay maybe he's not Warren Buffett (and SHLD is not Berkshire Hathaway), but he knows how to squeeze out exceptional value out of his investments. As soon as the news on Sears hit the tape, the talking heads were ready to write Mr. Lampert's business obituary. I think this is highly premature. I suspect that he still has a few tricks up his sleeve to shore up his at-risk capital and help out all shareholders. I am happy to continue to hold the shares.
I started buying the shares back in November and here is what I wrote when I bought some more in December:
"I don't know if this year-end volatility is due to tax-loss selling or not, but I am happy to use it to add to my position in SHLD. Nothing has changed since I bought the stock on November 30. Here is what I wrote at that time:
After months of looking at Sears, I finally used the recent weakness to take the plunge. The third quarter was a disappointment but many investors may be forgetting that SHLD is not just a retailer - it is part of Eddie Lampert's considerable investing legacy.
So far he has been able to cobble together a couple of bankrupt, lower-end retailers into an asset that generates about over $1 billion of cash per year. The company repurchased 6.7 million shares in Q3 (at prices around $131) and used some of its considerable cash on the balance sheet to stock up the stores for the holiday shopping season.
This year may not be the best for shoppers or retailers, but I think Mr. Lampert can take a longer view here and will use any weakness in the stock to buy up more of the shares. I can see the shares moving back to the $140 level in the next 6-9 months, assuming the earnings estimates hold ($7.71 for fiscal 08 and $8.27 for fiscal 09) and the US economy avoids recession.
Many people seem to think that Sears may be unable to sell assets in this credit crunch environment, but I think that good strategic deals still make sense and any reasonable banker (oxymoron?) would be happy to lend money to a buyer of Sears' assets that would be a natural fit to an existing business.
Recall that as late as October of this year, a Barron's article suggested that a Sears breakup could fetch as much as $300 a share.Finally, Mr. Lampert is one of the most successful investors out there and I am willing to invest shoulder to shoulder with him on this one."
__________________
By Mike Goodson: See his profile at Vestopia
I have seen a lot of commentary about this development and I think a lot of it misses the point. Some thoughts:
1) The retail environment is challenging right now. With all the concern about the housing market, high gas prices, the over-leveraged consumer and the threat of recession, it is no surprise that the consumer may be scaling back a bit.
2) Sears is a retailer. With both the Sears and K-mart brands, SHLD is subject to the ebbs and flows of the retail marketplace. It would be surprising if SHLD could do much better than the average retailer in this environment. That said, the announcement was a surprise to me and obviously others who follow the stock.
3) Sears may or may not need a make over. A compelling article in the WSJ contends that Sears needs to make massive changes to compete in the "brave new world" of discount retailing. When has discount retailing ever been an easy business to be in?? I think that IF Sears needs big changes, I would rather have some like Mr. Lampert at the helm rather than someone who has only been in retailing his or her entire career.
4) Valuation is very cheap now, but the upside is hard to measure. Some people were looking at SHLD as an asset play with all of its real estate. That way of valuing the company may not make much sense right now, but the real estate is not going away. I suspect that the current EPS estimates will represent something close to trough earnings and so we may not expect a premium multiple on them. If the company could earn $9.00 per share again (the result for FY06), what would the stock be worth? The company was buying back stock at $131 based on expected earnings of $7-8 or so. I think the shares could eventually move into that range again, but it's hard to say for sure at this point.
5) Stay with Lampert. Okay maybe he's not Warren Buffett (and SHLD is not Berkshire Hathaway), but he knows how to squeeze out exceptional value out of his investments. As soon as the news on Sears hit the tape, the talking heads were ready to write Mr. Lampert's business obituary. I think this is highly premature. I suspect that he still has a few tricks up his sleeve to shore up his at-risk capital and help out all shareholders. I am happy to continue to hold the shares.
I started buying the shares back in November and here is what I wrote when I bought some more in December:
"I don't know if this year-end volatility is due to tax-loss selling or not, but I am happy to use it to add to my position in SHLD. Nothing has changed since I bought the stock on November 30. Here is what I wrote at that time:
After months of looking at Sears, I finally used the recent weakness to take the plunge. The third quarter was a disappointment but many investors may be forgetting that SHLD is not just a retailer - it is part of Eddie Lampert's considerable investing legacy.
So far he has been able to cobble together a couple of bankrupt, lower-end retailers into an asset that generates about over $1 billion of cash per year. The company repurchased 6.7 million shares in Q3 (at prices around $131) and used some of its considerable cash on the balance sheet to stock up the stores for the holiday shopping season.
This year may not be the best for shoppers or retailers, but I think Mr. Lampert can take a longer view here and will use any weakness in the stock to buy up more of the shares. I can see the shares moving back to the $140 level in the next 6-9 months, assuming the earnings estimates hold ($7.71 for fiscal 08 and $8.27 for fiscal 09) and the US economy avoids recession.
Many people seem to think that Sears may be unable to sell assets in this credit crunch environment, but I think that good strategic deals still make sense and any reasonable banker (oxymoron?) would be happy to lend money to a buyer of Sears' assets that would be a natural fit to an existing business.
Recall that as late as October of this year, a Barron's article suggested that a Sears breakup could fetch as much as $300 a share.Finally, Mr. Lampert is one of the most successful investors out there and I am willing to invest shoulder to shoulder with him on this one."
__________________
By Mike Goodson: See his profile at Vestopia
