fcharlie

Altria: Tobacco Stock at a Discount

The same thing that always happens, they appeal, win, and raise the dividend.


On Nov 09 11:42 AM PastTense wrote:

> And what happens if Altria loses additional major lung cancer lawsuits?

Wells Fargo's Mortgage Conversion Scheme: Delaying the Inevitable

WFC now has the ability to continue to generate cash rather than not, has the ability to maintain the balance sheet rather than write it down, the ability to to space out whatever remains of losses that would have all been taken today over a four year period, and take advantage of future appreciation in prices from this point on. Six years from now the original homeowner may still be underwater, but WFC, even if they "kick the can down the road" can perhaps receive tens of thousands more dollars from foreclosure in 2014 simply by waiting for some appreciation in prices. How is this a bad idea? What's the alternative? If someone owed me $1,000 and they told me they couldn't pay me $50 a month anymore, would I say oh well I just accept it as lost, or would I allow them to pay $10 a month and see what happens? It's not a hard decision to make.

Walgreen's Rewards Shareholders with $2 Billion Repurchase Program

This buyback is pathetic considering WAG's cash flow and store count. They need to stop opening so many stores and buy back $2 billion of stock each year, not $2 billion over a four year period.

Will Altria Group Burn Out Long Term?

Dude, you can't even spell Philip Morris correctly and we're supposed to give you credibility??

All that matters is that Altria is growing. The dividend alone provides the return. The growth in the dividend takes you from an average to an above average investment. Add in the safety of MO's cash flows and you have a superior investment that will continue to trounce the market over time.

Kroger Gains Back Market Share from Wal-Mart

This is the problem with Seeking Alpha. Anyone can write anything they want. Kroger doesn't own any farms. Now you're saying that I said or implied that they "milk cows". You wrote an article that blatantly said "Did you know that Kroger actually owns several dairy farms" It's not true. And now that you can't reference any mention of this in the 10-K, you say you "believe Kroger contracts the function of milking cows", which isn't very convincing that you know what you are talking about.

I'm not trying to be a jerk, and I will sincerely apologize if you can cite any filing that Kroger owns farms. All you've done is cite manufacturing facilities that have the word 'farm' in their name. I'm in the process of making Kroger a major holding for myself, and I try to know as much as possible about a company. I'm not arguing for the fun of it, I just want an answer, and I think I've found it.

Kroger Gains Back Market Share from Wal-Mart

Jake,

are you confusing owning farms with owning dairy processing facilities? I see no mention of farm ownership in the fact book.

Don't Bet Against King Kroger

At these prices, Kroger is as close to a sure thing as I've seen in a while. They will continue to repay debt until they get a ratings upgrade. (they are already on ratings watch for one and management thinks it is imminent). Once they get it, they renegotiate their revolver and gain access to A2P2 commercial paper and then they resume massive share repurchases. This stock will be $30 before you know it. Boring, perhaps... but so easy to win with this one.

Kroger Gains Back Market Share from Wal-Mart

Please tell me where you found the information about Kroger owning dairy farms. I can't find any mention of it in the filings.

Don't Forget Sears' Housing Connection

Very interesting viewpoint on closing stores before Christmas. I guess we shall see early next year how many more stores get cut.

What is your opinion on how low domestic cash can safely go considering the revolver will get reduced in March 2010, and, being majority owned but not wholly owned, what could Eddie do to repatriate cash from Canada??

Don't Forget Sears' Housing Connection

Why close stores just before Christmas? I'd assume they are total dogs, or their leases are expiring now. That would be a good question to ask Eddie or Bruce at the annual meeting next year. Perhaps Eddie's reading this and will answer it in his letter to shareholders next year.

If you expect deflation, then i understand your forecast of down 25% sales three years for now. I don't. I think inflation will pick up, and moderate inflation is the friend of the retailer.

The margin trend i'm referring to is Kmart between Q3 2008 and Q1 2009, margins up steadily each quarter. Q4 op. income for Kmart was $274 mil, up from $237 mil the year before, even on 5% lower sales. You don't need sales increases to generate higher margins and profits, you really just need sales to be somewhat stable. I don't expect sales to rise, I do however expect them to flatten out, which would allow gross margins to improve.

Also, first quarter this year, total company margins were the 2nd highest since the merger, so It's possible for Sears to make tons of cash, but it's frustrating to not have any idea what to expect.

Don't Forget Sears' Housing Connection

Do you honestly think sales will be down 25% from here in three years? Are you considering higher than average inflation? Do you not think there's pent up demand for appliances out there? The Whirlpool execs say on every conference call that people are delaying purchases of appliances, even replacements for appliances that are beyond repair. How many people out there do you think are washing dishes by hand, or doing laundry at the laundromat while they are out of work? What impact do you see from a govt. program to replace old appliances? Sears has 1/3 of the appliance market.

Yes Sears has declining sales, but did you not notice the improvements in gross margins over the past year, with the exception of this quarter? Was that a fluke? The major hit to margins this past quarter was at Kmart, due to liquidation of inventory at stores that are closing. Remember in the most recent press release, Sears only expects $5 million in store closings expenses for the rest of the year. Sounds to me like they are winding down this round of store closings, so we should get a clear view if the margin trends that were in place come back. A small improvement in gross margin rate on even $35 billion is still huge. All things equal, a 1% improvement in gross margin on $35 billion equals $3.00 of earnings. The other side of being so leveraged to gross margin, in my opinion, was the problem in the past. Eddie never had intentions of growing the store base, yet he did increase inventory levels in 2007, which turned out to be a bad decision. In my opinion, that glut of inventory was the cause of the sharp decline in margins and massive drop in earnings during 2008. Assuming inventory is under control, Sears should still generate FCF sufficient to repurchase the remaining float over the next couple years, and I still do see a Berkshire Hathaway type vehicle in the works. What else would Eddie do with the cash? Declare a big dividend and go home? That's not his style. I think once the float is gone, Eddie will be more open to making open market purchases of stocks, more total return swap investing. Couldn't he do that today? Sure, but as soon as he does, the stock would no longer sell below book value. In an old letter to shareholders, Eddie said that his goal, just like Warren Buffets goal, is to increase the per share value of the company. Whats more beneficial to the per share intrinsic value of Sears, buying stock well below book value, or investing elsewhere? There's always a bargain out there. In the mid 90's bull market he found IBM right before it rallied 500% in five years. His Autozone position has run from $20 to $150 during this ten year bear market. Eddie can find winners to invest Sears cash in. I'd much prefer there be fewer shares outstanding before he begins to do so.

And yes, if Eddie could do it over again, he probably would have sold much more real estate in 2006-2007. He even hinted at that at the annual meeting in May, saying, that Sears was never a real estate play, but whether or not that was the right decision remains to be seen.

Eddie's a smart dude. Sears will generate a lot more cash than most think. The inventory values alone provide a massive margin of safety. It's fun to watch this unfold and I'm happy to be a shareholder, even if they are a crappy retailer.

Don't Forget Sears' Housing Connection

I am not trying to write a ringing endorsement of Kmart. I agree with you. The store in my town will probably close. It's probably not popular with the landlord. Less and less people will shop there in the future, and the stores next door to Kmart probably wish they weren't next door to Kmart. All of this is probably true.

The disconnect is when people apply that thinking to the stock and assume it must be a terrible investment. It's not. Kmart generates hundreds of millions of free cash flow. It was used as a platform to acquire Sears which generates hundreds of millions of free cash flow as well. The whole company is priced like it's going to die. Hey, tobacco use has been declining for 40 years in this country, and cigarette companies keep churning out cash. Kmart and Sears will do the same, and when it's all said and done, Eddie and whomever is remaining owning the shares will be sitting on a huge pile of cash too.

Don't Forget Sears' Housing Connection

Here's how Sears can buy up the remaining float in the next two years.

Sears has generated about 250 million of free cash flow during the first half of this year. It was ugly how they did it, as most came not out of GAAP earnings but rather out of the difference between the depreciation charge and actual Cap Ex. Ugly may be ugly, but cash is still cash. The 4th quarter is when SHLD will make most of it's money. Last year they earned $2.94 per share during the 4th quarter, so assume it's less this year, assume it's $2.50 per share. Then add back $100 million of of depreciation not spent and you get around 413 million of cash flow. Subtract pension and you're around $650-700 million free cash flow for the year. Assume next year is roughly the same, but you have to subtract more of a pension cash drain next year, so next years free cash flow is more like $450million. Now as you said earlier, Sears must decrease inventory as sales decrease. Assume sales fall 7% next year. 7% of $6 billion of net inventory and you have $420 million of cash that should be taken out of inventory. No long term debt is due until 2011, and obviously Eddie Lampert will not pay a dividend. One would have to assume that all free cash flow and most of that inventory that was converted to cash will be used to repurchase stock. $700 million+ $450 million +420 million equals $1.57 billion cash. At today's prices thats 24 million shares, and remember, there's only about 26 million of float. This of course assumes the stock price stays the same, which it probably won't, but it also assumes Sears fails to earn more free cash flow than we are projecting, even though they probably can. It also assumes that none of the four mentioned majority holders decide to sell, and if they do, I withdraw my entire case.

Don't Forget Sears' Housing Connection

A lot of companies have stopped their 401K match. You have to cut expenses when times are hard. I don't see any correlation between cutting 401K matches and Eddie not wanting anyone to share the wealth.

Also, your statement that Eddie will do well but others may not, while somewhat true, implies that most people purchased the stock high and are underwater. I for one did not. Not that it's relevant to business analysis, but I think the general attitude of most out there is that anyone who's long bought at $190 and is suffering, hanging on to a dream.

When i say "float" i refer to shares outstanding minus Eddie's, and I also net out Thomas Tisch, Bruce Berkowitz, and Bill Miller. Could they sell? Sure, but Tisch is on the board of directors and has owned 3+% of the company for years, Berkowitz owns over 10% and seems very content to hold, Bill Miller is a friend of Eddie Lamperts and seems to believe very much in him and his strategy. I also net out the millions of shares held by index funds, SPY spiders, QQQQ's, RTH, Vanguard S&P500 index funds, they own probably 5 million shares between them. There's really only about 26 million shares out there actually trading. If Sears continues to generate a mediocre $600-700 million free cash flow as it now is, after funding it's pension, it could wipe out 38% of this remaining float in the next six quarters. The rest of the float is sold short. I don't see how it could be a good idea to bet against it here.

What do you think Eddie will do with hundreds of millions of free cash flow when there is no float left? What would the market response be if he bought 25 million Philip Morris and 25 million Pfizer one quarter? The stock would skyrocket. I'm not saying it will happen, but he's not going to pay a dividend. The worst case scenario is he begins selling his ESL shares directly to Sears and cashes out while maintaining the same ownership %. Could I be wrong about all of it? Sure, but again, there's a massive pile of inventory backing up today's purchase price, so even if I am wrong, I don't see much downside.

Don't Forget Sears' Housing Connection

Kmart will earn enough during the 4th quarter to justify it's existence. Prior to this past quarter, gross margins had been trending higher for nearly a year, and if you believe the 10Q, the only reason gross margins stumbled is because of inventory markdowns at the stores that were being closed. We will have to wait until this round of store closings are finished to find out if that is exactly the truth, but it's not hard to believe. Sears/Kmart turns it's inventory only about 4 times per year. I can see them having to sell at fire sale prices or even dump inventory onto a closeout company just to get rid of the slow moving stuff.

I'm not trying to argue that Kmart is a nice store. I live very close to one. The store is old, the floor tiles are cracked, the sign out front is dirty, things ring up at the wrong prices sometimes, the shopping carts are old and rusty... but there are always people there shopping. always. I don't think they spend much at all on CapEx, nor should they. Whats the point? The typical Kmart customer could care less if the floor tiles are cracked or the lighting isn't great. Wait for Q4 to be released. Kmart will have hundred of millions of operating income on lower sales. Thats all they need. I think Eddie's strategy is the right one. What would you do? Spend all the cash flow on remodeling the store knowing that Wal-Mart will still kill you in the end, or milk it for cash and run off the leases, pay off debt, and wind it all down? Eddie's doing the right thing, in my opinion.