Sears Corporation (SHLD) is being valued by sell side analysts solely as an ongoing retail operation, but there is substantial value to be unlocked from its balance sheet.
Sell Side analyst Gary Balter recently called this company currently a game of Jenga and talked about how dissecting too many pieces of the company would result in the company falling apart. This analysis fails to account for the fact that Sears is dramatically changing its business model and that as this occurs, even more pieces of the balance sheet will be able to be monetized without the structure crumbling. The company is undervalued when examining Sears's substantial real estate, brands and tax carry-forwards.
The stock has been extremely volatile with limited accurate price discovery. Stock consensus is split between die hard bulls and bears. Looking at option activity there are large open positions in calls and puts, this shows how investors are anticipating a big price move over the next year as Sears unveils its ultimate strategy.
Horizon: 6-18 Months
Price Target: $55
Strategy: Deep Value; Contrarian
Analyst Consensus (Bear Case):
Analysts have a mean price target of $20 on Sears. One way analysts derive the price target is using a 12X multiple on projected 2014 EBITDA. The $20 price target does not take into account an analysis of Sears' balance sheet, which is what an investment at this point is contingent on.
How My View Differs:
I believe the asset base provides a floor on the stock price downside movement (an artificial put) and the retail transformation is a free option common stockholders receive. My view is for the most part in line with some of the aspects touched on by another Seeking Alpha contributor in Sears Holdings' Valuation: Between Berkshire Hathaway And Bankruptcy. This is a great article and I will reference components of it. The real estate valuation models referenced are extensive, however I believe looking at the recent JCP real estate analysis they are on the high side. I am still a bull on the stock but am more conservative in my price target. I am putting a price target of $55 on this stock.
Some notable value funds are in agreement with me: Force Capital Management, Fairholme, Chou Associates and of course ESL all have substantial long holdings in the name, via options or common equity. For more information on the long thesis, check out Fairholme's public case study.
-Creation of greater than $500 million liquidity this year
-Monetization of Carried At Cost Real Estate Portfolio
-Greater operational efficiency (Cost reductions)
-Retail Sales Growth
-Leadership: Visionary leader and experienced team
-Transition to membership centric, rewards business
Sears Holdings Corporation ("Holdings") is the parent company of Kmart Holding Corporation ("Kmart") and Sears, Roebuck and Co. ("Sears") formed as a Delaware corporation in 2004 in connection with the merger of Kmart and Sears (the "Merger") on March 24, 2005. Sears currently operates a national network of stores with 2,036 full-line and specialty retail stores in the United States operating through Kmart and Sears and 461 full-line and specialty retail stores in Canada operating through Sears Canada Inc. ("Sears Canada"), a 51% -owned subsidiary. It operates a number of websites under the sears.com and kmart.com banners, which offer more than 60 million products and provide the capability for its customers to engage in cross-channel transactions such as buy online/pick-up in store; buy in store/ship to home; and buy online, return in store.
Sears also is the home of SHOP YOUR WAY™, a social shopping experience where Members have the ability to earn points, receive additional benefits and interact/shop with each other through shopyourway.com. The Company is the leading home appliance retailer as well as a leader in tools, lawn and garden, fitness equipment and automotive repair and maintenance.
Key proprietary brands include Kenmore ®, Craftsman ® and DieHard ®. Sears also maintains a broad apparel offering including such well-known labels as Lands' End ® , the Kardashian Kollection, Jaclyn Smith, Joe Boxer, Sandra Lee and Levi's, as well as Sofia by Sofia Vergara and the Country Living Home Collection. Sears is also the nation's largest provider of home services, with more than 14 million service calls made annually.
The retail industry is changing rapidly. The progression of the Internet, mobile technology, social networking and social media is fundamentally reshaping the way Sears interacts with their core customers and members. As a result, Sears is transitioning to a membership company.
100% upside 50% downside
Downside Case: Downside case is $30 in my view, believe asset base will provide a floor and this would be an extremely conservative liquidation value. An article from 2012 cites the breakup value at over $100 per share. Recent analysis I have seen has put the breakup value between $20 and $70.
Upside Case: $80, this is a reasonable valuation given the company monetizes its asset base substantially, coupled with a retail transformation to a technology, membership business. I am conservatively looking for only a movement to $55.
Sears is attempting to become an internet-focused retailer and membership company.
The new Shopyourway.com looks strikingly similar to an amazon.com user interface. If anyone has a chance to take market share from Amazon, it would be a large retailer with established relationships like Sears. I think if successful, Sears can begin to take some of Amazon's billions in revenue. Analysts are only projecting $36 billion in revenue for FY-15, my contention is that this can be higher if Sears can successfully execute.
The Balance Sheet Provides a Floor On The Stock:
Source: Fairholme Case Study.
The real estate valuation is extremely tricky but looking at the JCP May '13 creditor presentation is very useful. The value per sq. ft. appears substantially less than the bulls had hoped. Using $40 per square foot for owned real estate, the real estate could be valued in the range of $6-$7 billion.
Source: Fairholme Case Study.
Sears has substantial value in its brands. Investors are getting approximately $5 billion in equity from the brands
Tax Loss Carry-Forwards:
The tax loss carry forwards will function to allow Sears to maximize its profit and gains from selling existing assets.
Sum of the Parts Valuation:
I have examined existing recent sum of the parts valuations and their assumptions, and feel the downside case of $30 is still reasonably conservative.
-Real estate, brands and other balance sheet items cannot be monetized at higher rates cited in this article due to macroeconomic or company specific issues
-Balance sheet items are valued at substantially lower than hypothesized
- General market downturn