Sears..Barron’s May Have Understated Upside (SHLD, CC, TGT, SPG)

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Sears Holdings Corp. (NASDAQ:SHLD) enjoyed a meteoric rise from 2003 to 2005, but now the company is facing the dead money status for investors after recently hitting near-term lows.  Eddie Lampert knows that this current status wasn’t the end-game goal.  This weekend’s issue of Barron’s points out the understated value of Sears.

The Barron’s article does a good job of pointing out the upside and the contingencies here.  The one issue that exists is that Sears as a retail player just isn’t doing that well and 24/7 Wall St. has pointed out how poor of a retailer it is.  But there is lot more to the story that we have been investigating for subscribers of our Special Situation Investing Newsletter which might imply close to a doubling of shares if the company makes the right calls.  There is the shot of a REIT-qualification aspect to Sears, but that will be another discussion at a different time.

Some of the factors that are working against the company are actually not the fault of the company.  And some are.  In fact, if you were going to evaluate the macro-scenario here we’d go ahead and warn the Sears permabulls that the raw numbers out of Eddie Lampert’s retail empire may have another 18 to 24 months of having to stomach poor retail results.  In its latest fiscal year, Sears mustered margins of 4.74%, in comparison to Penney’s 9.66%, Target’s 8.76% and Kohl’s’ 11.7%.

Sears_valuation_targets_2But there are two companies here that we believe will be the savior of the otherwise poor situation: Simon Property (NYSE:SPG) and Target (NYSE:TGT).  Simon is a very expensive stock with premium mall and shopping operations and it would be able to acquire the dirt owned and under long-term leases for a fay cry short of the lofty valuations of each square foot it owns.  It recently raised cash as well.  Target (NYSE:TGT) has already expressed that it outright wants to continue its current expansion and outlined a 25% increase in stores over the next few years. 

Eddie has to be noticing how poor Sears has done this year.  He isn’t arelative return manager that believes that if the sector or the marketfell by 12% that he is happy with an 9% loss.  We think he might infact be very close to a major shift that would be far more aggressivethan creative securitizing of brand royalties.  He definitely has theopportunity and motivation here.  There may still be a hidden $6Billion to $12 Billion that can be monetized if he decides that Searswould be a better empire as a smaller empire.  The REIT aspect alone isworth a look.  The company may continue retiring stock via buybacks,but the opportunity of launching a dividend (and a high one to boot)may be a better strategy with longer-term merits than quarter toquarter share buybacks.

Barron’s also notes…. A Screaming Bargain: The implied value of Sears’ retail real estate is absurdly low relative to competitors’ property.

There have been rumorsthat Circuit City (NYSE:CC) could become a target of the retail giant.As smart as Eddie is, 24/7 Wall St. would like to issue the "CaveatEmptor" warning IF he is really thinking about that.  Based on the poorstance and lack of competitive position of Circuit City, it is theopinion of 24/7 Wall St. that Sears would be shooting itself not justin the foot.  That might knock Sears stock down between 4% and 7%.We’d throw a yellow flag for a 15 yard penalty for uninvestorlikeconduct if Eddie thinks he has to have a better tech-sales platform.

Barron’s concludes: "SearsHoldings sells for $134 a share, but could have a break-up value ofmore than $300. If Lampert turns around its retail operations, theshares could rally to 200 or more."

There is of course theflip side of the story: Sears could keep think share buybacks andsmaller plans will ultimately win out, and if so then the company willhave to be evaluated merely on the merits of being a lagging retailer.If the retail situation continues and if the company doesn’t get moreaggressive on the surface, then there is nothing really to keep thestock from heading towards $100.00. 

It is the opinion of 24/7 Wall St. that "IF" Eddie can bolster up someof the damage here and decides that a smaller operator of Sears,K-Mart, and Lands End will be better to manage that the $200 mark couldend up being rather low.  $300 is a stretch because markets are rarelyTHAT inefficient in such a widely held situation.  Both Simon andTarget have the means, interest, and perhaps even the need to buy andassume some of the dirt.  Eddie could really capitalize off this.  Andit’s about time.

Jon C. Ogg
October 21, 2007

Jon Ogg is the editor of 24/7 Wall St.’s Special Situation Investing Newsletter; he does not own securities in the companies he covers.