SHLDQ - Sears Holdings Corp

[Luke 532]

If you can read a 10K and do some back of the envelope calculations to gather a view of Seritage, then the market has already done so.

 

EMH?

[krazeenyc]

I think some of you are missing a larger piece of this analysis: the REIT would have SHLD as their ONLY tenant (for all practical purposes).  SHLD isn't profitable with (a) below market leases and (b) not paying leases at all (depending on the location.)  Spinning the RE into a REIT would require market leases across the board.  That's like throwing gasoline on this fire.

 

Let's also not pretend like the current valuation gives no credit to Seritage.  If you can read a 10K and do some back of the envelope calculations to gather a view of Seritage, then the market has already done so.

 

There is no mention of Seritage in any SHLD filing.

[TwoCitiesCapital]

Parsad,

 

You said you exercised your options for shares recently due to the increased rate of monetization that is occurring.  I presume that we all agree that this is likely bullish for the stock. Wouldnt now be the time that you want the options given the inherent leverage and the increased probability of a move to the upside in the near term?

[wisdom]

For some perspective

 

Kmart and Sears Roebuck in 2002

 

PPE Kmart                                  $6B

land and building Sears              $7.3B

equipment sears                        $5B

 

Total                                            $18.3B

 

Today

SHLD  total property and equipment is        $5.6B

 

Where did that $12.7 B worth of property and equipment disappear?

Have Commercial RE values dropped since 2002?

[heth247]

I think some of you are missing a larger piece of this analysis: the REIT would have SHLD as their ONLY tenant (for all practical purposes).  SHLD isn't profitable with (a) below market leases and (b) not paying leases at all (depending on the location.)  Spinning the RE into a REIT would require market leases across the board.  That's like throwing gasoline on this fire.

 

That's my issue with the valuation of Seritage as well : where are they going to find all those new tenants to replace Sears, without a super strong economy?  Aren't people saying America already have too much retail?  Maybe that explains why  the portfolio of Seritage so far contains most of those small properties?

[krazeenyc]

For some perspective

 

Kmart and Sears Roebuck in 2002

 

PPE Kmart                                  $6B

land and building Sears              $7.3B

equipment sears                        $5B

 

Total                                            $18.3B

 

 

Today

SHLD  total property and equipment is        $5.6B

 

Where did that $12.7 B worth of property and equipment disappear?

Have Commercial RE values dropped since 2002?

 

Your facts are wrong. And the answer is Depreciation and Amortization.

Net Property & Equipment in 2002 for Kmart was $4.9

Net P&E in 2002 for Sears Roebuck was $6 Billion

$10.9 billion

 

In the last 10-K total P&E was $11.2 billion - $5.2 Billion Depreciation and Amortization for Net P&E of $6 billion.

 

[wisdom]

Are you sure about your numbers for sears:

http://www.utdallas.edu/~andersmc/6344/SEARS%202002.pdf

 

land + buildings and improvements + furnitureand equipment

0.4B + 6.9B + 5B = 12.3B

 

And my point was exactly that - do you believe there has been $12 B worth of depreciation over the last 11 years.

[wisdom]

While average commercial real estate prices are up 60% in the US between 2002 and 2012 - SHLD comm RE must be terrible to have lost that amount of value.

[CorpRaider]

Of course, it would probably be the norm for book values of the real estate to have little, if anything, to do with fair market value of real estate. 

[krazeenyc]

Are you sure about your numbers for sears:

http://www.utdallas.edu/~andersmc/6344/SEARS%202002.pdf

 

land + buildings and improvements + furnitureand equipment

0.4B + 6.9B + 5B = 12.3B

 

And my point was exactly that - do you believe there has been $12 B worth of depreciation over the last 11 years.

 

YES. I'm sure.  You are not reading the balance sheet correctly (you're reading the gross not including the capitalized leases) you did not include the accumulated depreciation).  $6.9 BILLION is the the Net property + equipment in 2002.  The accumulated depreciation is simply an accounting # doesn't affect what the property/land/equipment is actually worth.

[bmichaud]

"Let's also not pretend like the current valuation gives no credit to Seritage.  If you can read a 10K and do some back of the envelope calculations to gather a view of Seritage, then the market has already done so."

 

When BAC was at $5, one could easily have done the back of the napkin math on BAC ultimately earning $2 per share based on a 1% ROA and conclude that it was trading at 2.5x normal earnings.

 

When Yahoo! was at $15, the sotp math was easily calculated, Third Point had three seats on the board and a super experienced had just been hired.

 

When CHK was at $16, it didn't take a rocket scientist to figure out the assets net of liabilities were far in excess of the market cap. New management and a focus on debt pay down were the catalysts.

 

Need I go on about the market missing back of the napkin calculations?

[krazeenyc]

Wisdom,

 

I bought an apartment in Manhattan in 2000 for about $800,000. I've been renting it out for the past 10 years. IRS accounting rules allow me to depreciate the apartment over a 27.5 year time frame.  Over 10 years the apartment has "depreciated" 36.36% I get to write off the depreciated amount annually (appx $29K) against the rental income I receive.  The apartment is worth about 3x what I paid for it -- but based on GAAP accounting my apartment would worth only $510K.  This is the same way Sears property/land/equipment is depreciated (although there are different rules for commercial property/equipment/furniture/etc.)  Hope this helps.

[tooskinneejs]

" This is the same way Sears property/land/equipment is depreciated"

 

Land is not depreciated under US or any other GAAP.

 

[krazeenyc]

" This is the same way Sears property/land/equipment is depreciated"

 

Land is not depreciated under US or any other GAAP.

 

oops i meant to write buildings. srry. Yes.. land often just sits on the balance sheet at the original purchase price.

[ERICOPOLY]

Once comfortable with the downside of SHLD, there is still the decision of whose upside to choose from.

 

Somebody talked about downside around $40, and on the upside a double in SHLD over the next 2 years.  But that seems hard to see the timeframe on because you don't know how fast they'll kick the Sears stores out of the real estate and turn it into a proper REIT.

 

You get about 25.5% of at-the-money strike for accepting the downside of SHLD (Jan 2015 puts).

You pay about 12.7% of at-the-money strike for owning the upside of BAC (Jan 2015 calls).

 

So you can get almost 2x BAC upside while taking 1x SHLD downside.

 

So perhaps it doesn't matter what the upside is of SHLD (the "where" and the "when") if you can somehow determine the downside is only $40.  Personally, I'm not certain of it.  But some of you are it seems.

 

My little back of the envelope calculation I did for BAC yesterday put it at $21, and that's at only 13% ROTE.  At 14% ROTE, it's actually $22.41.  And of course that's right now.  You add in earnings on top of that level.  So they generate capital at the $2 per share per year level today (Using the DTA).  So I mean, you've got about $4 coming in over the next couple of years.  So getting to $25-$26 per share in two years.

 

That's a lot easier to see the upside.  It's 65% to 70% upside over two years, unleveraged.

 

Now, by taking the SHLD downside in order to get leverage on BAC, it's about 130% to 140% in two years.

 

That's with 1x SHLD downside leverage and 2x BAC upside leverage.

 

So by no means are you done simply by answering that SHLD has no downside from here.  You still need to ask whether SHLD is the right upside from here.  You really do have a choice -- you can't just stick your head in the sand and answer that your downside is protected.

 

I'm sure the board can find better upside than BAC -- I'm just sort of a one trick pony here but bringing it up to raise a point that if you can't put a finger on the SHLD upside, then why do it?  Why not buy the upside of something you can put a finger on -- maybe you get more certainty of upside, and it's leveraged since SHLD puts can bag you a lot of money with which to go shopping for upside elsewhere.

[muscleman]

Once comfortable with the downside of SHLD, there is still the decision of whose upside to choose from.

 

Somebody talked about downside around $40, and on the upside a double in SHLD over the next 2 years.  But that seems hard to see the timeframe on because you don't know how fast they'll kick the Sears stores out of the real estate and turn it into a proper REIT.

 

You get about 25.5% of at-the-money strike for accepting the downside of SHLD (Jan 2015 puts).

You pay about 12.7% of at-the-money strike for owning the upside of BAC (Jan 2015 calls).

 

So you can get almost 2x BAC upside while taking 1x SHLD downside.

 

So perhaps it doesn't matter what the upside is of SHLD (the "where" and the "when") if you can somehow determine the downside is only $40.  Personally, I'm not certain of it.  But some of you are it seems.

 

My little back of the envelope calculation I did for BAC yesterday put it at $21, and that's at only 13% ROTE.  At 14% ROTE, it's actually $22.41.  And of course that's right now.  You add in earnings on top of that level.  So they generate capital at the $2 per share per year level today (Using the DTA).  So I mean, you've got about $4 coming in over the next couple of years.  So getting to $25-$26 per share in two years.

 

That's a lot easier to see the upside.  It's 65% to 70% upside over two years, unleveraged.

 

Now, by taking the SHLD downside in order to get leverage on BAC, it's about 130% to 140% in two years.

 

That's with 1x SHLD downside leverage and 2x BAC upside leverage.

 

So by no means are you done simply by answering that SHLD has no downside from here.  You still need to ask whether SHLD is the right upside from here.  You really do have a choice -- you can't just stick your head in the sand and answer that your downside is protected.

 

I'm sure the board can find better upside than BAC -- I'm just sort of a one trick pony here but bringing it up to raise a point that if you can't put a finger on the SHLD upside, then why do it?  Why not buy the upside of something you can put a finger on -- maybe you get more certainty of upside, and it's leveraged since SHLD puts can bag you a lot of money with which to go shopping for upside elsewhere.

 

Excellent analysis, Eric. Any other stocks that you are currently looking at?  :)

 

I just applied and got two 0% APR for 18 month balance transfer credit card approved. I am thinking about doing a balance transfer to my checking account then to my IB account, and buy SHLD or some other stocks.

[prevalou]

Once comfortable with the downside of SHLD, there is still the decision of whose upside to choose from.

 

Somebody talked about downside around $40, and on the upside a double in SHLD over the next 2 years.  But that seems hard to see the timeframe on because you don't know how fast they'll kick the Sears stores out of the real estate and turn it into a proper REIT.

 

You get about 25.5% of at-the-money strike for accepting the downside of SHLD (Jan 2015 puts).

You pay about 12.7% of at-the-money strike for owning the upside of BAC (Jan 2015 calls).

 

So you can get almost 2x BAC upside while taking 1x SHLD downside.

 

So perhaps it doesn't matter what the upside is of SHLD (the "where" and the "when") if you can somehow determine the downside is only $40.  Personally, I'm not certain of it.  But some of you are it seems.

 

My little back of the envelope calculation I did for BAC yesterday put it at $21, and that's at only 13% ROTE.  At 14% ROTE, it's actually $22.41.  And of course that's right now.  You add in earnings on top of that level.  So they generate capital at the $2 per share per year level today (Using the DTA).  So I mean, you've got about $4 coming in over the next couple of years.  So getting to $25-$26 per share in two years.

 

That's a lot easier to see the upside.  It's 65% to 70% upside over two years, unleveraged.

 

Now, by taking the SHLD downside in order to get leverage on BAC, it's about 130% to 140% in two years.

 

That's with 1x SHLD downside leverage and 2x BAC upside leverage.

 

So by no means are you done simply by answering that SHLD has no downside from here.  You still need to ask whether SHLD is the right upside from here.  You really do have a choice -- you can't just stick your head in the sand and answer that your downside is protected.

 

I'm sure the board can find better upside than BAC -- I'm just sort of a one trick pony here but bringing it up to raise a point that if you can't put a finger on the SHLD upside, then why do it?  Why not buy the upside of something you can put a finger on -- maybe you get more certainty of upside, and it's leveraged since SHLD puts can bag you a lot of money with which to go shopping for upside elsewhere.

with this sort of reasonning , one would have missed Berkshire Hathaway In the 70´s

[heth247]

YES. I'm sure.  You are not reading the balance sheet correctly (you're reading the gross not including the capitalized leases) you did not include the accumulated depreciation).  $6.9 BILLION is the the Net property + equipment in 2002.  The accumulated depreciation is simply an accounting # doesn't affect what the property/land/equipment is actually worth.

 

I remember reading some thing before like that Kmart's PPE was marked down to $300MM in bankruptcy and Sears' PPE was marked up to fair value when it was bought by Kmart.  How do those (opposite) events skew the numbers?

[ERICOPOLY]

Once comfortable with the downside of SHLD, there is still the decision of whose upside to choose from.

 

Somebody talked about downside around $40, and on the upside a double in SHLD over the next 2 years.  But that seems hard to see the timeframe on because you don't know how fast they'll kick the Sears stores out of the real estate and turn it into a proper REIT.

 

You get about 25.5% of at-the-money strike for accepting the downside of SHLD (Jan 2015 puts).

You pay about 12.7% of at-the-money strike for owning the upside of BAC (Jan 2015 calls).

 

So you can get almost 2x BAC upside while taking 1x SHLD downside.

 

So perhaps it doesn't matter what the upside is of SHLD (the "where" and the "when") if you can somehow determine the downside is only $40.  Personally, I'm not certain of it.  But some of you are it seems.

 

My little back of the envelope calculation I did for BAC yesterday put it at $21, and that's at only 13% ROTE.  At 14% ROTE, it's actually $22.41.  And of course that's right now.  You add in earnings on top of that level.  So they generate capital at the $2 per share per year level today (Using the DTA).  So I mean, you've got about $4 coming in over the next couple of years.  So getting to $25-$26 per share in two years.

 

That's a lot easier to see the upside.  It's 65% to 70% upside over two years, unleveraged.

 

Now, by taking the SHLD downside in order to get leverage on BAC, it's about 130% to 140% in two years.

 

That's with 1x SHLD downside leverage and 2x BAC upside leverage.

 

So by no means are you done simply by answering that SHLD has no downside from here.  You still need to ask whether SHLD is the right upside from here.  You really do have a choice -- you can't just stick your head in the sand and answer that your downside is protected.

 

I'm sure the board can find better upside than BAC -- I'm just sort of a one trick pony here but bringing it up to raise a point that if you can't put a finger on the SHLD upside, then why do it?  Why not buy the upside of something you can put a finger on -- maybe you get more certainty of upside, and it's leveraged since SHLD puts can bag you a lot of money with which to go shopping for upside elsewhere.

with this sort of reasonning , one would have missed Berkshire Hathaway In the 70´s

 

You may be missing the nuance of the argument.

 

I have been asking people for their "where" target.  Do you sell after the first 50%, and then miss the next double shortly after?

 

So you are going to miss the Berkshire Hathaway in the 70s anyhow if you don't know that the stock is worth a lot more than $100.

 

Right, so is it?  How much does Prevalou say it's worth?  If you say $150, and sell it at $150, then you too are going to miss the Berkshire Hathaway of the 70s with that strategy, right?

 

Or for you is this a stock that you won't part with at any price because it is the Berkshire Hathaway of the 70s?

[Luke 532]

 

 

Or for you is this a stock that you won't part with at any price because it is the Berkshire Hathaway of the 70s?

 

Eric, I see the point of your two previous posts.  I, for one, believe SHLD has a chance of becoming a behemoth that yields excellent returns for decades (not to mention a wide margin of safety at the present time).  This is why I never gave a "I'll sell at $x" because I won't.  I'll buy puts to protect most of my gains.  The problem with my approach (and it will be a nice problem to deal with if we get there) is that the current strike prices only go so high (example: SHLD trades at $150 and strikes max out, as of right now, at $90 on the LEAPS).

 

Eric, at the end of the day, I want to own a very large amount of SHLD for a very long time.  I believe history will one day prove that 2013 and 2014 were excellent accumulation periods and I'll probably be kicking myself for not having more.

 

Of course I could be wrong, but even with that I think the odds are slim that one can be very wrong on SHLD at a price <$50.  I don't see any investments that have a better upside in the market today that also provide tangible and realistic downside protection.

[ERICOPOLY]

Luke,

How do you hold your SHLD?  There are a couple of approaches.

 

A) Straight shares

B) Straight shares + Lending income

C) Write at the money puts and purchase at-the-money-calls (you get upside leverage here because the two are not in parity with each other)

 

Other style?

[Luke 532]

Luke,

How do you hold your SHLD?  There are a couple of approaches.

 

A) Straight shares

B) Straight shares + Lending income

C) Write at the money puts and purchase at-the-money-calls (you get upside leverage here because the two are not in parity with each other)

 

Other style?

 

Straight shares and I've sold puts.  Put income used to add more shares anywhere near/under $50.  I've also considered option "C" instead of buying shares outright. 

 

I also own a small amount of deep OTM call options as part of my trading strategy (short squeeze), not an investment.

[ERICOPOLY]

You're right - Seritage could take on debt if it were spun out. Though since Current SHLD = CrapCo (b/c Seritage adds no value under the current construct), you might as well spin Seritage debt free for the benefit of shareholders. As far as debt service goes, debt holders are no worse off than pre-Seritage spin (collateral-wise, it appears Lampert has really made it difficult for creditors to access RE in a liquidation scenario...but maybe Kraven is right, and that doesn't matter in a cpt. 11 situation).

 

But yes: long-term debt net of working capital is ~$19 per share, which would bring Seritage down to $54 if spun with said debt load.

 

 

Suppose Seritage is spun out... 

 

Doesn't that spell THE END for the "Next Berkshire Hathaway" rumors?

 

Those people then dump on the runup.

 

So I think under the "hold forever" thesis of this being the "next BRK", it depends on Seritage to NOT be spun out.

 

I'm not saying I'm right, I'm just trying to sort out these seemingly conflicting bullish ideas.

[Luke 532]

 

Suppose Seritage is spun out... 

 

Doesn't that spell THE END for the "Next Berkshire Hathaway" rumors?

 

 

Not necessarily, he might use Sears Re (or something else) as his vehicle.  When I think of the next Berkshire I mean a company that generates cash for Lampert to invest as he sees fit (buy other companies, invest in existing companies under SHLD umbrella, etc.).  I don't think of SHLD as a carbon-copy of BRK (many that think the BRK/SHLD comparison is non-sense point to dissimilarities, I agree with the dissimilarities), but one that has similar advantages in terms of float, cash flow, etc. that can then be used by a proven investor and capital allocator.

 

You've actually hit on the primary reason I haven't used option C (writing ATM puts, buying ATM calls to take advantage of the pricing discrepancy) and that's because I want to make sure I have shares of anything that is spun-off.  There will be adjustments to strike prices, of course, but I also want actual ownership in any business that is spun-off.

[plato1976]

He can spin out the retailer, and it makes much more sense to use seritage and SHLD re as his berkshire (float plus rental as steady cash for re-investment......), he can even take enough debt from the original SHLD to make guys in retailer feel better and it's still better than the crappy retailer IMHO

 

Now I am really worrying if we get a bunch of spinoff and I need to take care of all those things next year - my position is small so not sure if it's worth the headache. Maybe I should make it a much larger position ? lol

 

You're right - Seritage could take on debt if it were spun out. Though since Current SHLD = CrapCo (b/c Seritage adds no value under the current construct), you might as well spin Seritage debt free for the benefit of shareholders. As far as debt service goes, debt holders are no worse off than pre-Seritage spin (collateral-wise, it appears Lampert has really made it difficult for creditors to access RE in a liquidation scenario...but maybe Kraven is right, and that doesn't matter in a cpt. 11 situation).

 

But yes: long-term debt net of working capital is ~$19 per share, which would bring Seritage down to $54 if spun with said debt load.

 

 

Suppose Seritage is spun out... 

 

Doesn't that spell THE END for the "Next Berkshire Hathaway" rumors?

 

Those people then dump on the runup.

 

So I think under the "hold forever" thesis of this being the "next BRK", it depends on Seritage to NOT be spun out.

 

I'm not saying I'm right, I'm just trying to sort out these seemingly conflicting bullish ideas.