fcharlie

Free Cash Flow Isn't Always so Free

United Rentals is an interesting story. While you make good points as to their poor capital allocation, it is well reflected in the stock price. The current stock price assumes a high probability they don't survive. In any normal environment, they are capable of earning GAAP $1.75-$2.00 per share. So the question now becomes, can they survive, and if they can, is it so cheap that one can overlook their poor decisions of the past and buy it anyways....During normal times, URI needs to spend big money on new equipment. A huge cash drain. They are counter-cyclical with regards to cash flow. Today, while they still spend money on new equipment, they take in more cash by selling old equipment. They have huge depreciation expense, and they're not spending any of it right now. This will allow them to survive. You can basically buy this company at three times normal earnings. When normal earnings return, sell it as fast as you can. It's not a great company, but it's so cheap that it doesn't have to be.

Retailers Face a Volatile January - Barron's

The funny thing about SHLD, it really has come down to two sides. On one side, you have the people who dislike the company, the stock, or both. They typically mention the appearance of the stores as the #1 problem, and typically claim the company will go bankrupt. These people, however, cannot give a logical, thought out explanation, from a financial viewpoint, as to how SHLD goes bust. When asked, they constantly change the subject, and mention some other gripe they have, such as, Lampert is manipulating the stock, or Lampert hired someone from Lehman Bros. (i assume to imply his intentions are to wreck his own company), or Lampert is starving the stores of capital, or Kmart cannot compete with Wal-Mart, therefore it is not relevant.

On the other side, you have people who look at SHLD and see the assets, see the free cash flow, see the debt decreasing, see the shares being bought back, and see the big picture. These people understand that there is more to SHLD than just a busted retailer. Lampert has admitted that Kmart cannot compete against Wal-Mart on price, he is quoted as saying that the only way for Kmart to remain relevant is to run the business for maximum cash flow.

And on the subject of his "manipulating" the stock... Let's remind ourselves of all the companies that spent billions buying back stock at prices significantly higher than today, not just SHLD. Many companies borrowed billions to repurchase shares. Home Depot borrowed billions to do a Dutch Tender at $37 share. Target borrowed $10 billion to buy back stock in the $50's... Cheesecake Factory borrowed hundreds of millions to buy back stock in the high teens and twenty's. Lowe's bought back billions in the $30's. New York Times? We won't even talk about their buybacks. Every one of these companies have since suspended their buybacks at prices a fraction of where they were once leveraging to repurchase. SHLD still is buying, and has reduced debt every year... and LAMPERT is the idiot????? I think not.

People often cite same store sales with SHLD, and claim that because they are down 9%, Lampert is wrecking the company.... Let's not forget to look at Target's same store sales, Gap, American Eagle Outfitters, Limited Brands, Barnes & Noble, Home Depot, Lowe's... etc... Where has all the money they've spent on store remodels gotten them?

The more crap i hear about SHLD and Lampert, the more the contrarian in me loves it. He's taking full advantage of the negativity buying back stock at 1/2 of book value. He's still among the best capital allocators out there, and he's got significantly more skin in the game than all of us combined.

Retailers Face a Volatile January - Barron's

MrsLinarcos.

I do not shop Sears, I do shop Kmart. Could you kindly inform me of whats happening with the company in your opinion, and how it ties in with Lampert manipulating the stock and his golden parachute you speak of?

Before Lampert came along, when Sears would spend money more freely on renovations, did it help sales? Did it make your store more profitable? Please tell.

Retailers Face a Volatile January - Barron's

MrsLinarcos,

Your comment doesn't make sense. Lampert has nearly his entire net worth in his hedge fund, and his hedge fund owns over 50% of SHLD. There isn't a golden parachute big enough to make up for the personal losses he would face should SHLD go down, therefore, I would assume he's more in control than you think. Why can't his hedge fund use some of the billions it raised last year with a 5 year lockup, to extend a line of credit to SHLD if needed? How do you go out of business if you have $7 billion in net inventory? Billions available in sale/leaseback's if needed? How do you go out of business if you are free cash flow positive? SHLD will generate over $4.00 in FCF for this year thats about to end. Next year? who knows.. could it get worse, sure.. cash flow negative? i doubt it... Regardless, with $78 a share in inventory and still one of the smartest and best out there running the company, i don't see SHLD going down, as you say.