Barron's, the venerable U.S. investing weekly, went negative on Sears Holdings Corp. in August, 2009, when the shares were around $65 (U.S.) apiece. Sales have declined in every quarter since, and the company has seesawed from profit to loss.
The company's Sears and Kmart nameplates "are considered also-rans, with too many tired stores in disadvantaged locations, subject to a slow bleed in sales," Barron's says.
Why, then, does the newspaper say, There's much more to Sears than meets the eye, and suggest the stock — now trading around $50 — "could be worth close to $100?"
In short, Barron's is casting its lot with those who see controlling shareholder Eddie Lampert as conducting an orderly and profitable slow-motion liquidation of the company. If he's successful, Barron's opines, the shares could reach the century mark.
I'm aware of the theory. In February, 2011, when Sears was trading above $90, I wrote a column for The Globe and Mail that ascribed a recent run-up in share price to a short squeeze, where those who borrow shares to bet the company will fall buy them instead to cover their positions. "This rising price action often has very little to do with the fundamental quality of a company," I noted, adding "investors are well-advised to go shopping somewhere else for a retail stock."
An old college friend who read it messaged me to suggest that I didn't understand Mr. Lampert's particular genius, and shareholders would be rewarded as he extracted the value of Sears Holdings' vast real estate positions.
My reaction, as it usually is when I'm told a struggling retail or restaurant chain is instead a real-estate play, is: Okay, but when? And how much value will be eroded through the current business as we wait?
In Sears Holdings' case, anyone who bought the stock at close to $100 is underwater by half as they wait for the plan to be executed. (Not to mention those who bought in 2007 at around $190.)
Barron's however, is making an intriguing case that the wind-down is ready to proceed, based on a corporate structure that places some of the company's more valuable brand names in a special partnership that is not a guarantor of the company's debt.
Meanwhile, bulls make the Zeller's argument — Sears Holdings' properties are carried at decades-old amounts on the balance sheet, and many of the stores have below-market leases that could be bought out by the landlords or by another user.
Of course, Barron's also notes Sears Holdings' shares aren't cheap. As the article was prepared, the company's enterprise value — market capitalization plus debt — was 11 times its EBITDA, or earnings before interest, taxes, depreciation and amortization; recent gains, including a 6 per cent jump Monday, now place the multiple at 13.1 on a forward basis, according to Standard & Poor's CapitalIQ.
That's just a hair behind Whole Foods Market Inc. and easily more expensive than Home Depot Inc., Costco Wholesale Corp. (under 10) Target Corp., Gap Inc. and Nordstrom are all between a 7 and 8 EV/EBITDA multiple.
That's a high price to pay to buy into a secret liquidation plan.