Sears Holdings: A Baby Berkshire in the Making?

Includes: SHLD, WMT
by: Alex Garcia

Last semester my history teacher and I used to stay after class and discuss the market. She asked me, about one month ago, what stock I like right now, and I mentioned Sears. Her reaction was not one that I had hoped for.

It struck me right away that she was not up to date with what was going on at Sears Holdings (NASDAQ:SHLD). She had the picture of a struggling American icon. I had the vision of a baby Berkshire Hathaway (NYSE:BRK.A).

Sears Holdings was created when Kmart Holding Corp. acquired Sears Roebuck, thus creating Sears Holdings Corp. Both Kmart and Sears have been around since the late 19th century and both struggled in the latter half of the 20th century as Wal-Mart (NYSE:WMT) expanded.

Below is the company profile from Yahoo Finance:

Sears Holdings Corporation, through its subsidiaries, operates as a retailer in the United States and Canada. The company operates through three segments: Kmart, Sears Domestic, and Sears Canada. The Kmart segment operates stores that offer general merchandise, including products sold under labels, such as Jaclyn Smith, Joe Boxer, and Martha Stewart Everyday, as well as in-store pharmacies. The Sears Domestic segment operates full-line stores that offer an array of products, including home appliances, consumer electronics, tools, fitness, and lawn and garden equipment; automotive services and products, such as tires and batteries; and home fashion products, as well as apparel, footwear, health, beauty, pantry, household products, and toys. This segment also operates specialty stores, which provide casual clothing, accessories, and footwear for men, women, and children, as well as home products and soft luggage. In addition, this segment provides product repair services for home appliances, lawn and garden equipment, consumer electronics, floorcare products, and heating and cooling systems. This segment also offers its products through apparel Web sites, catalog mailings, international businesses, and end retail stores. The Sears Canada segment operates retail stores, which offer apparel and other softlines. The company also offers its products through its Web sites. As of May 18, 2006, the company operated 3,900 full-line and specialty retail stores in the United States and Canada. Sears Holdings was founded in 1899 is headquartered in Hoffman Estates, Illinois.

To see why I think Sears Holdings will become the next Berkshire Hathaway, let's look at the man running the show, Edward Lampert. He graduated from Yale University in 1984 with a BA in economics. At Yale he was a member of the Skulls and Bones society and served as an interim at Goldman Sachs (NYSE:GS).

At age 25, Edward Lampert started his own hedge fund, ESL Investments. Using an investment style similar to Warren Buffett's, ESL Investments has averaged returns of 29% per year. ESL Investments became Kmart’s major shareholder when it built up a huge position at a time the company was going through bankruptcy and shares were depressed.

When ESL Investments became the largest shareholder, Edward Lampert became chairman of Kmart. He has also been credited for being the architect of the Kmart-Sears merger and has been called a genius by Marty Whitman of Third Avenue Management.
Let’s face it, Sears the retail operation is a mess. Same store sales continue to drop each quarter, but are slowly improving due to restructuring. In its latest
10-Q, management continues to reduce expenses, increase margins, cut inventory, and introduce Kmart brands (Martha Stewart Living) to Sears and vice versa. But the key point I’m trying to drive is the investments Edward Lampert is making.

Investment income accounted for 101 million of the company’s 327 million net income. This number continues to increase each quarter due to Sears Holdings producing cash flow from sales of intellectual property and tax breaks.

When I mentioned the company to my history teacher, it sold around $175 and is now selling at $168, creating a buying opportunity for those interested. This is a perfect long term stock, as long as Edward Lampert continues to invest cash flow and improves the operation of the core business. I won't put a price tag on this puppy but for the sake of it let's say $110,000..

Disclaimer: I do not own shares of SHLD

Related: The Next Berkshire Hathaway?

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