Average Joe Investor

Flaws in Jim Cramer's Sears Analysis

Adam - good catch and thanks for pointing that out. Maybe we could retitle the post "Flaws in Average Joe's Analysis of Flaws in Jim Cramer's Sears Analysis." You are correct that as shares go down the EPS is going to go up by an equal amount and the p/e will stay at 17.8x.

I still stand by my underlying theme, though, that Cramer is oversimplifying the share buyback process and discounts the fact that the company burns through balance sheet cash as it buys up these shares. Though you will not see the rise in p/e that I mentioned, what you will see is a rise in both enterprise value / sales and ent value / EBITDA.

The argument for using cash to buy back shares could be that Lampert wants to unlock the value of the large amount of cash on the balance sheet. My best guess is that the share price already accounts for this as SHLD (which has around $25/share in cash) trades at a premium to TGT and WMT on a p/e basis but at a discount to the two on a EV/rev and EV/EBITDA basis. Using hopefully better math here, if you use up the cash hoard, take out the shares mentioned and keep the per share price the same you'll see the p/e drop down to just under the level of TGT and WMT and the EV/rev and EV/EBITDA multiples creep up closer to what the other two are at.

Which brings me around to the other point - is Sears as a business worth as much or more than Target or Walmart? I wouldn't be surprised if we see a short term rise in the stock just based on the financial engineering that Lampert is doing, but as a long term investment I am not a Sears bull for sure...

Joey