SHLDQ - Sears Holdings Corp

[peridotcapital]

Not that anybody cares, but at the current price of $44 here's the way I look at it.  I believe there's really no way Lampert won't extract at least $40 for shareholders even if everything blows up in his face (he can extract value via spinoffs, monetizing real estate, and all the stuff we've been discussing on this thread).  So, $4 of downside (yes, I'm well aware that the stock could trade below $40) vs. an upside we can't even calculate.  I know some disagree but I believe the fact that we can't quantify the max upside is a good thing.  I'm not saying I agree with any of the following valuations, but let's look at the risk/reward odds based on what you might think SHLD is worth.  The "At $XX" is the amount you think SHLD is worth.

 

At $60 it's 4:1 ratio in your favor ($16 upside vs $4 downside)

At $80 it's 9:1

At $100 it's 14:1

At $150 it's 26:1

...and so on.

 

I would love to hear how you get to a minimum of $40 in a worst case scenario. You've mentioned that number a lot, but I've never seen any figures outlining how you get there. Now since I'm new here maybe I was just missed it, or maybe you don't care to share (which is totally fine).

 

I'm just curious because if you add up all of the monetizations Eddie has completed so far (spin-offs, rights offerings, and special dividends) you get about $13 per share of value (that does not include Lands End). You're saying there's at least $40 more to come in some form or another even if everything blows up in his face. How do you get there?

 

If he distributes the rest of Sears Canada, that's $6. Maybe Lands End is another $6. Sears Auto Centers another $3 maybe. I guess you believe the real estate, if spun out, would be worth $25+ per share, even though hardly any of it is generating a return? Just curious your thought process.

[Luke 532]

I would love to hear how you get to a minimum of $40 in a worst case scenario.

 

It's just a rough calculation of what I think the brands, real estate, subsidiaries, etc. are worth and how I handicap Lampert's ability to extract value from those assets while also his ability to effectively manage the liabilities.

[peridotcapital]

I would love to hear how you get to a minimum of $40 in a worst case scenario.

 

It's just a rough calculation of what I think the brands, real estate, subsidiaries, etc. are worth and how I handicap Lampert's ability to extract value from those assets while also his ability to effectively manage the liabilities.

 

Fair enough. If the stock keeps dropping I may be long here in the not-too-distant future. A price with a "3" in front of it starts to get interesting to me. When I wrote the two skeptical articles recently the stock was as high as $65. It hasn't even been a month yet and we're approaching $40. Never a dull moment...

[plato1976]

They can spin off kenmore etc. and it's worth quite a lot

So they can get 20-30 even without any real estate spinoff

 

Not that anybody cares, but at the current price of $44 here's the way I look at it.  I believe there's really no way Lampert won't extract at least $40 for shareholders even if everything blows up in his face (he can extract value via spinoffs, monetizing real estate, and all the stuff we've been discussing on this thread).  So, $4 of downside (yes, I'm well aware that the stock could trade below $40) vs. an upside we can't even calculate.  I know some disagree but I believe the fact that we can't quantify the max upside is a good thing.  I'm not saying I agree with any of the following valuations, but let's look at the risk/reward odds based on what you might think SHLD is worth.  The "At $XX" is the amount you think SHLD is worth.

 

At $60 it's 4:1 ratio in your favor ($16 upside vs $4 downside)

At $80 it's 9:1

At $100 it's 14:1

At $150 it's 26:1

...and so on.

 

I would love to hear how you get to a minimum of $40 in a worst case scenario. You've mentioned that number a lot, but I've never seen any figures outlining how you get there. Now since I'm new here maybe I was just missed it, or maybe you don't care to share (which is totally fine).

 

I'm just curious because if you add up all of the monetizations Eddie has completed so far (spin-offs, rights offerings, and special dividends) you get about $13 per share of value (that does not include Lands End). You're saying there's at least $40 more to come in some form or another even if everything blows up in his face. How do you get there?

 

If he distributes the rest of Sears Canada, that's $6. Maybe Lands End is another $6. Sears Auto Centers another $3 maybe. I guess you believe the real estate, if spun out, would be worth $25+ per share, even though hardly any of it is generating a return? Just curious your thought process.

[merkhet]

I would love to hear how you get to a minimum of $40 in a worst case scenario. You've mentioned that number a lot, but I've never seen any figures outlining how you get there. Now since I'm new here maybe I was just missed it, or maybe you don't care to share (which is totally fine).

 

I'm just curious because if you add up all of the monetizations Eddie has completed so far (spin-offs, rights offerings, and special dividends) you get about $13 per share of value (that does not include Lands End). You're saying there's at least $40 more to come in some form or another even if everything blows up in his face. How do you get there?

 

If he distributes the rest of Sears Canada, that's $6. Maybe Lands End is another $6. Sears Auto Centers another $3 maybe. I guess you believe the real estate, if spun out, would be worth $25+ per share, even though hardly any of it is generating a return? Just curious your thought process.

 

I think I'd quibble with you on the Sears Canada valuation as I think using just the current market quote of Sears Canada for a $6.44 per share valuation would be short-sighted, and I think it's worth $10 per share to Sears Holdings shareholders.

 

In any case, I can get to $33.79 in equity value without touching the real estate.

 

(1) Land's End - $5.66 per share assuming he loads it with 2.5x EBITDA of debt

(2) Sears Canada - $6.44 per share using the market quote

(3) Sears Auto Center - $4.71 per share based on $2 billion of revenue

(4) Kenmore, Craftsman, Diehard - $16.98 per share based on $1.8 billion asset-backed securitization

 

Each of the four above probably has upside to my estimate (except possibly Sears Auto).

 

My guess is that, based on tax assessed values, Seritage is worth around $6 per share (though I haven't finished my research on the Multi-Tenant properties). 

 

My further guess is that you'll take some issue with that since they're not leased yet, but just because they're not generating leasing revenue does not meant they're worth zero. :)

[plato1976]

The problem is can they spin off all these if they want ?

Will the earning situation deteriorate even more for the entity left behind ?

No idea if you are allowed to spin off things that will bankrupcy whatever left

 

I would love to hear how you get to a minimum of $40 in a worst case scenario. You've mentioned that number a lot, but I've never seen any figures outlining how you get there. Now since I'm new here maybe I was just missed it, or maybe you don't care to share (which is totally fine).

 

I'm just curious because if you add up all of the monetizations Eddie has completed so far (spin-offs, rights offerings, and special dividends) you get about $13 per share of value (that does not include Lands End). You're saying there's at least $40 more to come in some form or another even if everything blows up in his face. How do you get there?

 

If he distributes the rest of Sears Canada, that's $6. Maybe Lands End is another $6. Sears Auto Centers another $3 maybe. I guess you believe the real estate, if spun out, would be worth $25+ per share, even though hardly any of it is generating a return? Just curious your thought process.

 

I think I'd quibble with you on the Sears Canada valuation as I think using just the current market quote of Sears Canada for a $6.44 per share valuation would be short-sighted, and I think it's worth $10 per share to Sears Holdings shareholders.

 

In any case, I can get to $33.79 in equity value without touching the real estate.

 

(1) Land's End - $5.66 per share assuming he loads it with 2.5x EBITDA of debt

(2) Sears Canada - $6.44 per share using the market quote

(3) Sears Auto Center - $4.71 per share based on $2 billion of revenue

(4) Kenmore, Craftsman, Diehard - $16.98 per share based on $1.8 billion asset-backed securitization

 

Each of the four above probably has upside to my estimate (except possibly Sears Auto).

 

My guess is that, based on tax assessed values, Seritage is worth around $6 per share (though I haven't finished my research on the Multi-Tenant properties). 

 

My further guess is that you'll take some issue with that since they're not leased yet, but just because they're not generating leasing revenue does not meant they're worth zero. :)

[wisdom]

$30s would be awesome. In the $30s this will be a 20% position for me. Current weighting - in low teens.

[constructive]

They can spin off kenmore etc. and it's worth quite a lot

 

KCD is integral to SHLD. It appears impossible to spin it off without generating severe cash flow problems at SHLD.  Additionally as a pure play Sears creditor, the market would not give it much value as an independent company.

[peridotcapital]

I would love to hear how you get to a minimum of $40 in a worst case scenario. You've mentioned that number a lot, but I've never seen any figures outlining how you get there. Now since I'm new here maybe I was just missed it, or maybe you don't care to share (which is totally fine).

 

I'm just curious because if you add up all of the monetizations Eddie has completed so far (spin-offs, rights offerings, and special dividends) you get about $13 per share of value (that does not include Lands End). You're saying there's at least $40 more to come in some form or another even if everything blows up in his face. How do you get there?

 

If he distributes the rest of Sears Canada, that's $6. Maybe Lands End is another $6. Sears Auto Centers another $3 maybe. I guess you believe the real estate, if spun out, would be worth $25+ per share, even though hardly any of it is generating a return? Just curious your thought process.

 

I think I'd quibble with you on the Sears Canada valuation as I think using just the current market quote of Sears Canada for a $6.44 per share valuation would be short-sighted, and I think it's worth $10 per share to Sears Holdings shareholders.

 

In any case, I can get to $33.79 in equity value without touching the real estate.

 

(1) Land's End - $5.66 per share assuming he loads it with 2.5x EBITDA of debt

(2) Sears Canada - $6.44 per share using the market quote

(3) Sears Auto Center - $4.71 per share based on $2 billion of revenue

(4) Kenmore, Craftsman, Diehard - $16.98 per share based on $1.8 billion asset-backed securitization

 

Each of the four above probably has upside to my estimate (except possibly Sears Auto).

 

My guess is that, based on tax assessed values, Seritage is worth around $6 per share (though I haven't finished my research on the Multi-Tenant properties). 

 

My further guess is that you'll take some issue with that since they're not leased yet, but just because they're not generating leasing revenue does not meant they're worth zero. :)

 

I agree with you on Sears Canada's intrinsic value (I'm long it), but if we are assuming a "worst case" scenario I cannot assume it will go up to that level from here, which is why I used the current market value (which in said scenario could actually be too high).

 

I suspect Sears Auto Centers is materially less profitable than many believe, so I would be lower there. I also think using the $1.8B par value of the KCD ABS as its value may be aggressive. It's been 7+ years since those were issued. Licensing and royalty revenue from the brands has to be far lower today than it was back then. I'm not sure the ABS would be worth par if they were monetized.

 

I don't quibble with $6 for Seritage. I would never argue they have no value, I just think the ultimate value takes longer to come to fruition, and therefore the time value discount for me is likely higher than many peg it to be. I am far more likely to disagree that we ignore the liabilities when we try to get to $40/share or thereabouts. I would be shocked if Eddie could spin off $40/share of value and not have the debt eat into any of that for equity shareholders.

[krazeenyc]

 

You are right that gross margin is largely the problem. It's very rare to have a consistently and solidly profitable retail company with GM in the 20's. Safeway has comparable GM to Sears and we all know how lousy/low-margin the traditional grocery store business is.

 

The revenue mix explains a lot of the delta vs Macy's and JCP. Think about how much of SHLD's revenue is appliances. Macy's and JCP don't have that category. That skews the market share figures. Sears looks close to Macy's in terms of market share, but if you adjust for the revenue mix (expensive appliances at Sears), then Macy's actually sells far more items and has better inventory turnover. That likely explains a huge portion of the gross margin differential.

 

At Sears -- Gross Margins are actually better than they were in the 1990s, early 2000s. Kmart Gross Margins are atrocious b/c at this point 1/3 of all sales are basically groceries. YIKES. (I can't see ANY Kmarts continuing on, but who knows). 

 

Sears' Gross Margins in 1996-1998 were 26, 26.37, 25.7%.  2001-2003 Gross Margins were  26.6% 28.2%, 27.8% (I skipped 1999-2000 b/c they seemed to change the format of their income statements then).  Seems like SHLD is not promoting heavily or cramping their gross margins.

 

Anyone have any guesses as to what legacy issue is causing SG&A to be so elevated at Sears Roebuck? (Even backing out 1 time items like pension/store closings).

 

I'm adding to Sears aggressively. I bought a 5% position in the summer (Avg price $41)  which ballooned to over 7% + by going up 50% in 2 months. (Which i luckily sold).  I just doubled my position and now have a 1% position which I'm willing to aggressively add to. Other than Eddie Lampert divesting 7 million shares there has been a lot of positive news that has been going on at SHLD.

 

Like you Peridot, I'm hoping for the stock to have a 3 in front of it.

 

[merkhet]

The problem is can they spin off all these if they want ?

Will the earning situation deteriorate even more for the entity left behind ?

No idea if you are allowed to spin off things that will bankrupcy whatever left

 

My sense from the loan documentation is that there isn't a restriction to spinning these guys out so long as they aren't in default of their obligations.

 

On the bankruptcy side, (A) I don't think that spinning these guys out will bankrupt anyone left on the inside and (B) as a general matter, I think fraudulent transfers have to occur within one year of the filing to be actual fraudulent transfer (and there's a separate test for constructive fraudulent transfer).

 

Remember that there are two types of bankruptcy: (1) liquidity (inability to meet your interest payments) and (2) solvency (total liabilities greater than assets) -- the latter is more serious than the former.

 

$30s would be awesome. In the $30s this will be a 20% position for me. Current weighting - in low teens.

 

I'll tell you why I bought a large chunk at a little under $40 on August 22nd. I had a very similar thought to you in January 2012 when Sears hit $29 a share, and I thought to myself -- if only it was $10 lower. I have since realized that my ability to time the market is low and since I believe Sears is worth substantially greater than $40, I'm perfectly fine having $40 as my cost basis.

 

KCD is integral to SHLD. It appears impossible to spin it off without generating severe cash flow problems at SHLD.  Additionally as a pure play Sears creditor, the market would not give it much value as an independent company.

 

I don't understand why KCD is a Sears creditor?

 

I agree with you on Sears Canada's intrinsic value (I'm long it), but if we are assuming a "worst case" scenario I cannot assume it will go up to that level from here, which is why I used the current market value (which in said scenario could actually be too high).

 

I suspect Sears Auto Centers is materially less profitable than many believe, so I would be lower there. I also think using the $1.8B par value of the KCD ABS as its value may be aggressive. It's been 7+ years since those were issued. Licensing and royalty revenue from the brands has to be far lower today than it was back then. I'm not sure the ABS would be worth par if they were monetized.

 

I don't quibble with $6 for Seritage. I would never argue they have no value, I just think the ultimate value takes longer to come to fruition, and therefore the time value discount for me is likely higher than many peg it to be. I am far more likely to disagree that we ignore the liabilities when we try to get to $40/share or thereabouts. I would be shocked if Eddie could spin off $40/share of value and not have the debt eat into any of that for equity shareholders.

 

Chad, can you explain to me what the "worst case" scenario is that you're referencing above?  I don't understand how you're using that phrase or what situation you're referencing.

 

Why do you suspect Sears Auto Centers is materially less profitable? (I could also just as clearly state that I believe it is materially more profitable...)

 

I think KCD comes down to whether you believe KCD was worth exactly $1.8 billion when it was securitized.  For instance, I think Goldman lent J.C. Penney $2 billion for a secured note on all their real estate, but my guess is that J.C. Penney's 110 million square feet of real estate is worth more than $18 a square foot.  (Especially since the Strip Centers in Seritage have a tax assessed value of $40/sq. ft. on average.)

 

Let's also not forget that the inventory and the accounts receivable are used as collateral for the debt.  I think they have some commercial paper in the low 100 millions that's unsecured by the inventory and accounts receivable but that's a negligible amount of unsecured paper.

 

As of August 3rd, 2013, they had AR + inventories of almost $8.3 billion. (I'm using Q2 instead of Q3 because I don't want to overestimate based on inventory buildup for the holiday season.)  Against Q3 borrowings of $4.2 billion and payables of $2.9 billion -- if I was a secured creditor, I'd still feel pretty good about that.  Plus, I'm first (or second, in the case of the non-revolver & term loan creditors) in line to grab some of Sears' real estate?  Again, feeling pretty good.

[merkhet]

Anyone have any guesses as to what legacy issue is causing SG&A to be so elevated at Sears Roebuck? (Even backing out 1 time items like pension/store closings).

 

I've been digging but I haven't found anything yet. It's a good question to ask at the shareholders' meeting.

[wisdom]

Quote from: wisdom on Today at 09:44:23 AM

$30s would be awesome. In the $30s this will be a 20% position for me. Current weighting - in low teens.

 

I'll tell you why I bought a large chunk at a little under $40 on August 22nd. I had a very similar thought to you in January 2012 when Sears hit $29 a share, and I thought to myself -- if only it was $10 lower. I have since realized that my ability to time the market is low and since I believe Sears is worth substantially greater than $40, I'm perfectly fine having $40 as my cost basis.

 

 

Merkhet - You are correct and being totally rational about it. I have to admit there is some bias there in my case. Like you I believe the downside is limited and the upside is much higher. Thus, the already significant position.

 

My cost basis is higher than yours - so I would be averaging down and would like to lower my cost. I am hoping the usual tax loss selling in SHLD at this time of the year along with tapering, budget impasse create enough rough waters allowing me buy at lower prices. It is what I am wishing for rather being based in reality  :P

[wisdom]

Considering my cash position is just under 30%. Maybe I am being too greedy  :)

[peridotcapital]

 

Chad, can you explain to me what the "worst case" scenario is that you're referencing above?  I don't understand how you're using that phrase or what situation you're referencing.

 

 

Luke had brought up the idea of $40/share being the worst case scenario floor for the stock if things at SHLD got really ugly, so that is what I was referring to. In that case, I don't think we'll see $20+ for Sears Canada post-dividend.

 

Why do you suspect Sears Auto Centers is materially less profitable? (I could also just as clearly state that I believe it is materially more profitable...)

 

 

I think simply using a comp like PepBoys for Sears Auto will be overly aggressive based on the work I've done on the business.

 

I think KCD comes down to whether you believe KCD was worth exactly $1.8 billion when it was securitized.  For instance, I think Goldman lent J.C. Penney $2 billion for a secured note on all their real estate, but my guess is that J.C. Penney's 110 million square feet of real estate is worth more than $18 a square foot.  (Especially since the Strip Centers in Seritage have a tax assessed value of $40/sq. ft. on average.)

 

I'm not saying there was no cushion in the valuation of the ABS, but that same cushion would be there if the ABS were sold to a third party. Nobody is going to pay par for those ABS (in my view), given how much less in revenue those brands generate in 2013 vs 2006. I believe the value of KCD is declining right along with SHLD's retail operations.

[merkhet]

Chad, can you explain to me what the "worst case" scenario is that you're referencing above?  I don't understand how you're using that phrase or what situation you're referencing.

Luke had brought up the idea of $40/share being the worst case scenario floor for the stock if things at SHLD got really ugly, so that is what I was referring to. In that case, I don't think we'll see $20+ for Sears Canada post-dividend.

 

Sorry if it seems like I'm harping on the same thing over and over again. I'm sure that it's just because I'm missing something here but I asked what you meant by "worst case" and your response is that it means when "things get really ugly."

 

What is the ugly thing you are guarding against? Is it nuclear war? Alien invasion? (The hyperbole is illustrative here and not an attack -- just trying to show that I haven't a clue what you mean by "things getting really ugly.")

 

Why do you suspect Sears Auto Centers is materially less profitable? (I could also just as clearly state that I believe it is materially more profitable...)

I think simply using a comp like PepBoys for Sears Auto will be overly aggressive based on the work I've done on the business.

 

So then I'm curious as to the procedure that you used to come up with your $300 million valuation. Do you disagree with the $2 billion in revenue? What sort of a comparison are you making?  Did you compare it with PepBoys and the gave it a 50% discount? If so, why the 50% discount?

 

I think KCD comes down to whether you believe KCD was worth exactly $1.8 billion when it was securitized.  For instance, I think Goldman lent J.C. Penney $2 billion for a secured note on all their real estate, but my guess is that J.C. Penney's 110 million square feet of real estate is worth more than $18 a square foot.  (Especially since the Strip Centers in Seritage have a tax assessed value of $40/sq. ft. on average.)

I'm not saying there was no cushion in the valuation of the ABS, but that same cushion would be there if the ABS were sold to a third party. Nobody is going to pay par for those ABS (in my view), given how much less in revenue those brands generate in 2013 vs 2006. I believe the value of KCD is declining right along with SHLD's retail operations.

 

Let's say I accept your premise that KCD has had declining revenue as a result of Sears' declining retail operations.  Once KCD is outside of Sears, won't they start selling KCD elsewhere?  Let's not forget that KCD are all still market leaders in their respective industries...

 

I think one of the reasons we keep talking past one another is that you're looking at the spin-offs as "if they spin it off to me, what can I get for it about five minutes after they spin it to me"?  And I'm looking at the valuation a little more broadly than that... (I could be wrong about this though.)

[merkhet]

Considering my cash position is just under 30%. Maybe I am being too greedy  :)

 

Sorry if you felt like I was calling you out on the thread -- I wasn't. You just happened to have written about your thought process, which I think is shared by quite a few people here.

[peridotcapital]

Chad, can you explain to me what the "worst case" scenario is that you're referencing above?  I don't understand how you're using that phrase or what situation you're referencing.

Luke had brought up the idea of $40/share being the worst case scenario floor for the stock if things at SHLD got really ugly, so that is what I was referring to. In that case, I don't think we'll see $20+ for Sears Canada post-dividend.

 

Sorry if it seems like I'm harping on the same thing over and over again. I'm sure that it's just because I'm missing something here but I asked what you meant by "worst case" and your response is that it means when "things get really ugly."

 

What is the ugly thing you are guarding against? Is it nuclear war? Alien invasion? (The hyperbole is illustrative here and not an attack -- just trying to show that I haven't a clue what you mean by "things getting really ugly.")

 

Why do you suspect Sears Auto Centers is materially less profitable? (I could also just as clearly state that I believe it is materially more profitable...)

I think simply using a comp like PepBoys for Sears Auto will be overly aggressive based on the work I've done on the business.

 

So then I'm curious as to the procedure that you used to come up with your $300 million valuation. Do you disagree with the $2 billion in revenue? What sort of a comparison are you making?  Did you compare it with PepBoys and the gave it a 50% discount? If so, why the 50% discount?

 

I think KCD comes down to whether you believe KCD was worth exactly $1.8 billion when it was securitized.  For instance, I think Goldman lent J.C. Penney $2 billion for a secured note on all their real estate, but my guess is that J.C. Penney's 110 million square feet of real estate is worth more than $18 a square foot.  (Especially since the Strip Centers in Seritage have a tax assessed value of $40/sq. ft. on average.)

I'm not saying there was no cushion in the valuation of the ABS, but that same cushion would be there if the ABS were sold to a third party. Nobody is going to pay par for those ABS (in my view), given how much less in revenue those brands generate in 2013 vs 2006. I believe the value of KCD is declining right along with SHLD's retail operations.

 

Let's say I accept your premise that KCD has had declining revenue as a result of Sears' declining retail operations.  Once KCD is outside of Sears, won't they start selling KCD elsewhere?  Let's not forget that KCD are all still market leaders in their respective industries...

 

I think one of the reasons we keep talking past one another is that you're looking at the spin-offs as "if they spin it off to me, what can I get for it about five minutes after they spin it to me"?  And I'm looking at the valuation a little more broadly than that... (I could be wrong about this though.)

 

I guess you'll have to ask Luke what he meant. I just assumed that his worst case scenario meant the lowest possible value per share he sees even if none of the optimistic assumptions play out. So if you have a range of possible future outcomes, you assume the worst one materializes, even if you don't think that is most likely. Not unlike Baker Street having a low, mid, and high estimate of break-up value. The "low" would be the floor in their eyes.

 

I used $300M for Sears Auto because that was Baker Street's "low" end figure and this board seems to cite the Baker Street report. Since I am not overly excited about Sears Auto's business, that seemed like a fair number to put out there.

 

The reason I'm using actual values I might expect to be able to sell these pieces for, again, is because we were talking about a floor value of $40  (in terms of a margin of safety vs the stock at $44 today). If you are thinking in those terms, I think it is reasonable to assume that the more optimistic assumptions about the intrinsic value of the business (and by "optimistic" I mean that the market consensus turns out to be wrong and therefore $43/share is too low of a price for stock today) never actually come to fruition. Luke's point was that, in his mind, even in that case you still thinks he'll wind up with at $40/share of SHLD assets, so buying at $44 seemed like a no-brainer.

[peridotcapital]

Let's say I accept your premise that KCD has had declining revenue as a result of Sears' declining retail operations.  Once KCD is outside of Sears, won't they start selling KCD elsewhere?  Let's not forget that KCD are all still market leaders in their respective industries...

 

By the way, the last article I read (WSJ, I think) said that Kenmore is now #3 in the U.S. so they are no longer market leaders and are losing more share every day. Not sure where Craftsman and Diehard rank...

 

Added: And don't assume more stores means more market share... Kmart added KCD to its stores and market share still declined...

[thecynic]

Not that anybody cares, but at the current price of $44 here's the way I look at it.  I believe there's really no way Lampert won't extract at least $40 for shareholders even if everything blows up in his face ..

 

I think the downside is greater than $4 (or share price of $40). Assuming the floor to be EL's cost basis, then the downside risk is a share price of $20. According this article from 2006 http://articles.chicagotribune.com/2006-07-21/business/0607210116_1_eddie-lampert-sears-and-kmart-edward-lampert the original cost basis for ESL/Third Avenue funds' investment in KMART/Sears in 2003 was $10. His later buys have been at higher prices, so the average is perhaps around $20.

[Guest wellmont]

there are two downsides. the downside of the value. and the downside of the price. the downside of the price is considerable.

[peridotcapital]

there are two downsides. the downside of the value. and the downside of the price. the downside of the price is considerable.

 

Unless the company implements a dividend payout ratio of 100%, there is no assurance the true value will ever be realized by the investor. That is the danger, and why price cannot be ignored.

[merkhet]

I guess you'll have to ask Luke what he meant. I just assumed that his worst case scenario meant the lowest possible value per share he sees even if none of the optimistic assumptions play out. So if you have a range of possible future outcomes, you assume the worst one materializes, even if you don't think that is most likely. Not unlike Baker Street having a low, mid, and high estimate of break-up value. The "low" would be the floor in their eyes.

 

See? We're talking past one another again. You're using generalities, and I'm asking about specifics.

 

I believe we were speaking directly about Sears Canada when talking about the worst case scenario.  What is your worst case scenario for Sears Canada? What's the intrinsic value of Sears Canada during that worst case scenario?

 

I used $300M for Sears Auto because that was Baker Street's "low" end figure and this board seems to cite the Baker Street report. Since I am not overly excited about Sears Auto's business, that seemed like a fair number to put out there.

 

Sadly, they didn't give a reasoning for why they put $300 million for the Sears Auto portion of the business.  I personally think that a franchise model for Sears would be worth more than ~7% sales, but we may have to disagree on this.

 

The reason I'm using actual values I might expect to be able to sell these pieces for, again, is because we were talking about a floor value of $40  (in terms of a margin of safety vs the stock at $44 today). If you are thinking in those terms, I think it is reasonable to assume that the more optimistic assumptions about the intrinsic value of the business (and by "optimistic" I mean that the market consensus turns out to be wrong and therefore $43/share is too low of a price for stock today) never actually come to fruition. Luke's point was that, in his mind, even in that case you still thinks he'll wind up with at $40/share of SHLD assets, so buying at $44 seemed like a no-brainer.

 

I'm confused by this.

 

The price you're able to sell any of the various pieces for at any given moment may not equate to the value of any of the various pieces at that given moment, no?

 

Hell, if they spun out all the real estate into a shell entity that literally just held real estate (no debt, no operations, etc.) and that shell entity traded for $1 million on the open market, that hardly means that the real estate is worth $1 million.

 

By the way, the last article I read (WSJ, I think) said that Kenmore is now #3 in the U.S. so they are no longer market leaders and are losing more share every day. Not sure where Craftsman and Diehard rank...

 

Added: And don't assume more stores means more market share... Kmart added KCD to its stores and market share still declined...

 

I'm struggling to reconcile "they are losing more share every day" with the following... http://www.jdpower.com/consumer-ratings/homes/index.htm. I'd like to see the data on them losing share, though...

 

Kmart adding KCD is not really the same as Home Depot, Lowes, Best Buy, etc. adding KCD to their stores.

 

Also, I'm wondering why I'm getting pushback on $1.8 billion when Baker Street's low is $2.2 billion. Since you were willing to use their estimate for the Auto Centers, why the pushback on KCD?

 

there are two downsides. the downside of the value. and the downside of the price. the downside of the price is considerable.

 

Unless the company implements a dividend payout ratio of 100%, there is no assurance the true value will ever be realized by the investor. That is the danger, and why price cannot be ignored.

 

I think one of the few faith-based tenants for value investors is that eventually value becomes reflected in price... so you might get some push-back on that statement.

[Luke 532]

 

Unless the company implements a dividend payout ratio of 100%, there is no assurance the true value will ever be realized by the investor. That is the danger, and why price cannot be ignored.

 

I think one of the few faith-based tenants for value investors is that eventually value becomes reflected in price... so you might get some push-back on that statement.

 

I was about to respond with something similar.  If price and value never meet then value investing is rendered useless and we might as well become momentum investors or day traders.  With that said, value can depreciate to meet the price or price can appreciate to meet value (or a little bit of both).  What I like about SHLD is that I believe the value is very attractive today and that it will increase over time... thus causing an even greater divergence between price and value in the investor's favor.

[peridotcapital]

I guess you'll have to ask Luke what he meant. I just assumed that his worst case scenario meant the lowest possible value per share he sees even if none of the optimistic assumptions play out. So if you have a range of possible future outcomes, you assume the worst one materializes, even if you don't think that is most likely. Not unlike Baker Street having a low, mid, and high estimate of break-up value. The "low" would be the floor in their eyes.

 

See? We're talking past one another again. You're using generalities, and I'm asking about specifics.

 

I believe we were speaking directly about Sears Canada when talking about the worst case scenario.  What is your worst case scenario for Sears Canada? What's the intrinsic value of Sears Canada during that worst case scenario?

 

The "worst case scenario" concept was not from me, so I can't give you any specifics. Given all the uncertainties with Sears Holdings, I don't think I can identify a so called "floor" for intrinsic value. Luke's comment was "I believe there's really no way Lampert won't extract at least $40 for shareholders even if everything blows up in his face (he can extract value via spinoffs, monetizing real estate, and all the stuff we've been discussing on this thread)." All I did was ask him how he arrived at $40, that's all.

 

The reason I'm using actual values I might expect to be able to sell these pieces for, again, is because we were talking about a floor value of $40  (in terms of a margin of safety vs the stock at $44 today). If you are thinking in those terms, I think it is reasonable to assume that the more optimistic assumptions about the intrinsic value of the business (and by "optimistic" I mean that the market consensus turns out to be wrong and therefore $43/share is too low of a price for stock today) never actually come to fruition. Luke's point was that, in his mind, even in that case you still thinks he'll wind up with at $40/share of SHLD assets, so buying at $44 seemed like a no-brainer.

 

I'm confused by this.

 

The price you're able to sell any of the various pieces for at any given moment may not equate to the value of any of the various pieces at that given moment, no?

 

Hell, if they spun out all the real estate into a shell entity that literally just held real estate (no debt, no operations, etc.) and that shell entity traded for $1 million on the open market, that hardly means that the real estate is worth $1 million.

 

I was making the assumption that just because I personally might think Stock X is worth Y, there is no guarantee that Y is correct, and therefore there is no guarantee Y will be realized in the marketplace. So if one were to take a pessimistic view of their thesis on any stock, they might conclude that it's possible that the market price will not reach their opinion of intrinsic value. If one believes SHLD is undervalued, but is purposely trying to low-ball their estimates (to determine the potential downside to them), I don't see why using the current market value of Sears Canada is such a bad thing.

 

I'm struggling to reconcile "they are losing more share every day" with the following... http://www.jdpower.com/consumer-ratings/homes/index.htm. I'd like to see the data on them losing share, though...

 

Also, I'm wondering why I'm getting pushback on $1.8 billion when Baker Street's low is $2.2 billion. Since you were willing to use their estimate for the Auto Centers, why the pushback on KCD?

 

I simply assume that if your sales are declining on an absolute basis then you are losing market share (very few markets are contracting on the whole).

 

Some things I agree with Baker Street (or anyone else) more or less on. That's what makes a market!

 

I think one of the few faith-based tenants for value investors is that eventually value becomes reflected in price... so you might get some push-back on that statement.

 

But there may be a difference between actual value and one's personal estimate of that value. There is no guarantee they will be approximately the same, as I'm sure we have all experienced many times over the years.