SHLDQ - Sears Holdings Corp

[Luke 532]

 

I believe he said the assets at SHLD are worth $150, not the stock!  Take Eddie's word for it -- they are not earning an acceptable return on their assets (actually, they earn a negative return).  So assets that return less than they "should" are going to be discounted in the stock price.  So Bruce knows that too, but he's only talking about the assets per share without mentioning what they should be valued at in the stock.

 

Eric, you're remembering it wrong.  He didn't say asset value he said "Value of Sears' net assets", which is the same as NAV which is the value of each share.

 

"Headlines shout of Sears’ disastrous 2013 loss of $12 per share. A longer history shows that since the merger of Sears with Kmart, about 9 years ago, Sears has distributed over $66 of cash per share via buybacks and spin-offs and has paid down $27 per share of a pension liability that is no different, in our view, from debt. Fairholme research estimates that the fair value of Sears’ net assets exceeds $150 per share. If our research is accurate, we expect Sears’ market price of $38 to increase to this value over time."

 

If he didn't have the word "net" in there then your point would be valid, but he does.

 

[bmichaud]

 

Non-Core Retail Liquidation: +$.8B

Core Retail NWC: -$1.8B

Pension: -$1.2B

Core RE: $10.2B

Total Valuation: $8B, or $75 per share

 

 

Where did the 4.2B in debt go again?  Are you spinning the Core Re and trying to leave the debt behind?

 

I'd test your model to accommodate the borrowing base test so as you liquidate your 1600 stores any revolver/ term loan impacts are accomidated.  Just eyeballing, in your model the borrowing base goes from something like 6.7B (not adjusted for SCC/LE) to about 1.3B not adjusted for SCC/LE.

 

"“Borrowing Base” means, at any time, an amount equal to

(a) 85% of the aggregate outstanding Eligible Credit Card Accounts Receivable at such time plus

(b) 85% of the Eligible Pharmacy Receivables at such time plus

© the lesser of (i) 70% of the Net Eligible Inventory at such time and

(ii) 80% of the Net Orderly Liquidation Value at such time, minus

(d) 100% of the then Availability Reserves.

The Agent may, in its Permitted Discretion after the expiration of the Reserve Notice Period, adjust

Availability Reserves and Inventory Reserves used in computing the Borrowing Base.

"

 

Spin

 

Spin,

 

You're right. Debt comes before the "general creditors" - I should have included debt in the "net working capital" calculation, and left the "other current liabilities" detached.

 

The point I was driving at is that the RE is unencumbered, thus the equity should be valued as such.

 

Also - at the end of the 6-year liquidation period, if the "core retail" is still generating $2MM/store, then EBITDA of $800MM would support the general creditors and/or debt holders.

[Guest wellmont]

I noticed that Paul Swinand at Morningstar had a price target of $10 on SHLD. The disparity between Bruce's estimate at +$150 and Morningstar's estimate at $10 is huge! Someone is very wrong. Can anyone on this board think of big mistakes that Bruce has made investing? In following him for a little while, I can't recall any beyond exiting positions such as Pfizer and Wellpoint too early.

 

bruce just bought 800k shares (around $30m) for himself with money he made managing billions of $ over many years. Paul cashed his paycheck on Friday and went out for a couple of beers. but he probably picked up the tab. :)

[wisdom]

The only stocks BB  has bought for himself are LUK, AIG and SHLD in the last 5 odd years that he has bought for his funds. No way of knowing whether he bought into BAC personally.

 

Previously AIG had been the largest - 500k share.

 

He now personally owns 783k SHLD.

 

At an average of $35 that is a larger investment then in AiG.

[stahleyp]

wisdom, where are you seeing what he personally owns?

[DCG]

If Eddie was a good judge of SHLD's stock price, he probably wouldn't have been buying huge amounts of his company's stock at well over $100/share. He just seems in way over his head with every aspect of this business. Running a hedge fund is not the same as running a large retailer. He just refuses to admit that.

[wescobrk]

 

"I also noticed Morningstar had a "fair value" for BAC of $14"

I have a subscription to Morningstar and I've been very unimpressed with their analysis on the banks the past couple of years.

They said bac would have to raise equity capital for over at least a year after buffetts injection.

 

They also don't even bother to check basic numbers. For example, they currently argue citi is worth tangible book at 45 a share.

It hasn't had tangible book at 45 for at least two years.

Very sloppy work in my opinion.

[ERICOPOLY]

which is the same as NAV which is the value of each share.

 

NAV is most definitely not the value of each share.

 

The value of each share is... well you know, the current discounted value of all future cash flows (including those from potential liquidation).  Therefore, if you incur negative or sub-par cash flows (compared to what those assets should be earning), then you have to discount those assets!  No big revelation here.

 

You can have net asset value of $100 a share.  And you can have intrinsic value per share of $5.  And you can have BOTH AT THE SAME TIME!  All depends on how quickly you burn through that $100.

 

In other words, you are only in the situation where the shares are worth the NAV if the assets actually earn their keep!

 

In Eddie's own words, they don't!  That situation might not persist forever, but there will be a time span for which it does.  Thus, it is not worth NAV!  No way!

 

 

[Luke 532]

which is the same as NAV which is the value of each share.

 

NAV is most definitely not the value of each share.

 

The value of each share is... well you know, the current discounted value of all future cash flows (including those from potential liquidation).  Therefore, if you incur negative or sub-par cash flows (compared to what those assets should be earning), then you have to discount those assets!  No big revelation here.

 

You can have net asset value of $100 a share.  And you can have intrinsic value per share of $5.  And you can have BOTH AT THE SAME TIME!  All depends on how quickly you burn through that $100.

 

In other words, you are only in the situation where the shares are worth the NAV if the assets actually earn their keep!

 

In Eddie's own words, they don't!  That situation might not persist forever, but there will be a time span for which it does.  Thus, it is not worth NAV!  No way!

 

Eric, I meant "share value" in the most basic sense: (assets - liabilities) / oustanding shares.  That's what Berkowitz is getting at... he wasn't saying assets are $150/share, he was saying assets minus liabilities are $150/share.

[ERICOPOLY]

Person "A" pays $1 NAV for an asset that returns 7% a year, and he has $1.07 a year from now.

Person "B" pays $1 NAV for an asset that loses 7% a year, and he has 93 cents a year from now.

Person "C" pays $1 NAV for an asset that breaks even, and he has $1.00 a year from now.

 

So, which guy(s) made the mistake?

 

That's why Sears Holdings isn't worth NAV if it's assets don't produce any return -- in fact, especially if they produce a loss.

 

[ERICOPOLY]

which is the same as NAV which is the value of each share.

 

NAV is most definitely not the value of each share.

 

The value of each share is... well you know, the current discounted value of all future cash flows (including those from potential liquidation).  Therefore, if you incur negative or sub-par cash flows (compared to what those assets should be earning), then you have to discount those assets!  No big revelation here.

 

You can have net asset value of $100 a share.  And you can have intrinsic value per share of $5.  And you can have BOTH AT THE SAME TIME!  All depends on how quickly you burn through that $100.

 

In other words, you are only in the situation where the shares are worth the NAV if the assets actually earn their keep!

 

In Eddie's own words, they don't!  That situation might not persist forever, but there will be a time span for which it does.  Thus, it is not worth NAV!  No way!

 

Eric, I meant "share value" in the most basic sense: (assets - liabilities) / oustanding shares.  That's what Berkowitz is getting at... he wasn't saying assets are $150/share, he was saying assets minus liabilities are $150/share.

 

That's exactly what I am saying he means.  I agree, asset minus liabilities is the way to calculate NAV.  But that means TITS!  It isn't what the shares are worth.

 

Then you have to discount it to the present, because those assets are not earning what they should be earning.

 

The market isn't stupid.  An asset earning a negative return or a break-even return is not worth as much as an asset earning a positive return.

 

And an asset should be earning a positive return, or it will be discounted.  This deserves a resounding "Duh".

[Luke 532]

And an asset should be earning a positive return, or it will be discounted.  This deserves a resounding "Duh".

 

"Duh" is right, this is basic.  I just thought you were saying something different and was surprised as it was coming from you, but reading back over your posts I can see what you were trying to convey and I just misinterpreted it.

[ERICOPOLY]

And an asset should be earning a positive return, or it will be discounted.  This deserves a resounding "Duh".

 

"Duh" is right, this is basic.  I just thought you were saying something different and was surprised as it was coming from you, but reading back over your posts I can see what you were trying to say and I just misinterpreted what you were saying.

 

 

Right, so I get that.  The internet is hard.

 

My point though is Berkowitz is never mentioning that the shares should be worth less than NAV.  He only puts up the relatively high number (NAV) and says nothing more.  It's almost like he's trying to talk up the price, because we all know he knows better.  We all know he understands that underperforming assets are worth less than NAV.  Yet he never goes there.  It disappoints me (as a fan of Berkowitz, which I am on balance).

[wisdom]

Paul - from Fairholme capitals 13 g/a filings

Mr. Berkowitz beneficially owns 783,000 Common Shares of Sears Holding Corporation in his individual capacity.

 

You can go back and find them in all the 13 g/a filings and work backwards.

[adesigar]

Person "A" pays $1 NAV for an asset that returns 7% a year, and he has $1.07 a year from now.

Person "B" pays $1 NAV for an asset that loses 7% a year, and he has 93 cents a year from now.

Person "C" pays $1 NAV for an asset that breaks even, and he has $1.00 a year from now.

 

So, which guy(s) made the mistake?

 

That's why Sears Holdings isn't worth NAV if it's assets don't produce any return -- in fact, especially if they produce a loss.

 

And without knowing details of Guarantor v/s Non Guarantor everything you said is meaningless.

Person "B" pays $1 NAV for Sears Shares which consist of $1 of Real Estate. This Real Estate goes up in value with Inflation irrespective of whether it produces returns or not. The retail could lose money for the next 100 years but if the Real Estate is in a good location and is bankruptcy remote from the retail explain how Person "B" will lose money?

 

 

[T-bone1]

Person "A" pays $1 NAV for an asset that returns 7% a year, and he has $1.07 a year from now.

Person "B" pays $1 NAV for an asset that loses 7% a year, and he has 93 cents a year from now.

Person "C" pays $1 NAV for an asset that breaks even, and he has $1.00 a year from now.

 

So, which guy(s) made the mistake?

 

That's why Sears Holdings isn't worth NAV if it's assets don't produce any return -- in fact, especially if they produce a loss.

 

Eric, not necessarily saying this is the case, but as a thought exercise:

 

What if no one is counting inventory as part of SHLD's NAV, and what if every year the company needs less and less of it?

 

Is it possible that selling inventory (an asset people essentially value at zero) at an accounting loss is actually adding to rather than subtracting from the NAV?

 

Like I said, it's obviously not that simple, but I think this is worth considering.

 

-T-bone1

 

 

[ERICOPOLY]

Person "A" pays $1 NAV for an asset that returns 7% a year, and he has $1.07 a year from now.

Person "B" pays $1 NAV for an asset that loses 7% a year, and he has 93 cents a year from now.

Person "C" pays $1 NAV for an asset that breaks even, and he has $1.00 a year from now.

 

So, which guy(s) made the mistake?

 

That's why Sears Holdings isn't worth NAV if it's assets don't produce any return -- in fact, especially if they produce a loss.

 

And without knowing details of Guarantor v/s Non Guarantor everything you said is meaningless.

Person "B" pays $1 NAV for Sears Shares which consist of $1 of Real Estate. This Real Estate goes up in value with Inflation irrespective of whether it produces returns or not. The retail could lose money for the next 100 years but if the Real Estate is in a good location and is bankruptcy remote from the retail explain how Person "B" will lose money?

 

 

Let's take a long term view... let's say, last 5 years.

 

What has the return been on the NAV over the past 5 years?  Has this "bankruptcy remote" thing been there all along the past 5 years?

 

 

[ERICOPOLY]

Person "A" pays $1 NAV for an asset that returns 7% a year, and he has $1.07 a year from now.

Person "B" pays $1 NAV for an asset that loses 7% a year, and he has 93 cents a year from now.

Person "C" pays $1 NAV for an asset that breaks even, and he has $1.00 a year from now.

 

So, which guy(s) made the mistake?

 

That's why Sears Holdings isn't worth NAV if it's assets don't produce any return -- in fact, especially if they produce a loss.

 

Eric, not necessarily saying this is the case, but as a thought exercise:

 

What if no one is counting inventory as part of SHLD's NAV, and what if every year the company needs less and less of it?

 

Is it possible that selling inventory (an asset people essentially value at zero) at an accounting loss is actually adding to rather than subtracting from the NAV?

 

Like I said, it's obviously not that simple, but I think this is worth considering.

 

-T-bone1

 

I'm not sure what your exact point is regarding inventory...  that's probably more because I'm retarded impaired than anything else.

 

But if Bruce Berkowitz is right, and if there is NAV of $140 per share, then they should be earning $14 a share if they are generating 10% return on their net assets.  That's net assets... in other words, they are using leverage, so 10% isn't unrealistic.

 

But they aren't returning $14 a year.  So it... should be... discounted.  That's my only point.

 

 

[Mephistopheles]

Person "A" pays $1 NAV for an asset that returns 7% a year, and he has $1.07 a year from now.

Person "B" pays $1 NAV for an asset that loses 7% a year, and he has 93 cents a year from now.

Person "C" pays $1 NAV for an asset that breaks even, and he has $1.00 a year from now.

 

So, which guy(s) made the mistake?

 

That's why Sears Holdings isn't worth NAV if it's assets don't produce any return -- in fact, especially if they produce a loss.

 

And without knowing details of Guarantor v/s Non Guarantor everything you said is meaningless.

Person "B" pays $1 NAV for Sears Shares which consist of $1 of Real Estate. This Real Estate goes up in value with Inflation irrespective of whether it produces returns or not. The retail could lose money for the next 100 years but if the Real Estate is in a good location and is bankruptcy remote from the retail explain how Person "B" will lose money?

 

 

 

The bankruptcy remote subs are owned by the guarantors. So in effect, if shit hits the fan, they would go to the creditors.

[adesigar]

Person "A" pays $1 NAV for an asset that returns 7% a year, and he has $1.07 a year from now.

Person "B" pays $1 NAV for an asset that loses 7% a year, and he has 93 cents a year from now.

Person "C" pays $1 NAV for an asset that breaks even, and he has $1.00 a year from now.

 

So, which guy(s) made the mistake?

 

That's why Sears Holdings isn't worth NAV if it's assets don't produce any return -- in fact, especially if they produce a loss.

 

And without knowing details of Guarantor v/s Non Guarantor everything you said is meaningless.

Person "B" pays $1 NAV for Sears Shares which consist of $1 of Real Estate. This Real Estate goes up in value with Inflation irrespective of whether it produces returns or not. The retail could lose money for the next 100 years but if the Real Estate is in a good location and is bankruptcy remote from the retail explain how Person "B" will lose money?

 

 

Let's take a long term view... let's say, last 5 years.

 

What has the return been on the NAV over the past 5 years?  Has this "bankruptcy remote" thing been there all along the past 5 years?

 

Its been there since the merger I think but no one knows the details. If the Real Estate is not bankruptcy remote your version of $1 becoming $.93 is correct. If it is bankruptcy remote then NAV has gone up with Real Estate values over the past 5 years.  The thing is we don't know and Eddie Lampert is extremely secretive.

 

Imagine a completely hypothetical scenario where at Berkshire(SHLD) if Mid American (Sears) and BNSF (Kmart) started making losses and there is no way they will get back to making profits. That would in no way affect the value of Berkshires stock portfolio (Sears real Estate/Brands) which is held by the insurance subsidiary(SearsRe, Sears Brands). This portfolio would keep going up in value.

[adesigar]

Person "A" pays $1 NAV for an asset that returns 7% a year, and he has $1.07 a year from now.

Person "B" pays $1 NAV for an asset that loses 7% a year, and he has 93 cents a year from now.

Person "C" pays $1 NAV for an asset that breaks even, and he has $1.00 a year from now.

 

So, which guy(s) made the mistake?

 

That's why Sears Holdings isn't worth NAV if it's assets don't produce any return -- in fact, especially if they produce a loss.

 

And without knowing details of Guarantor v/s Non Guarantor everything you said is meaningless.

Person "B" pays $1 NAV for Sears Shares which consist of $1 of Real Estate. This Real Estate goes up in value with Inflation irrespective of whether it produces returns or not. The retail could lose money for the next 100 years but if the Real Estate is in a good location and is bankruptcy remote from the retail explain how Person "B" will lose money?

 

 

 

The bankruptcy remote subs are owned by the guarantors. So in effect, if shit hits the fan, they would go to the creditors.

 

And what would be the point of setting up a Non Guarantor Subsidiary and have it owned by the Guarantor Subsidiary?

[ERICOPOLY]

If it is bankruptcy remote then NAV has gone up with Real Estate values over the past 5 years. 

 

Commercial real estate should be discounted if it only appreciates and doesn't generate rental income.  They effectively have an owned real estate portfolio that has a singular deadbeat tenant (Sears).

 

I guarantee you the stock price of SPG would drop if the tenants collectively signed a pact not to pay rent for the next N years.

 

SHLD is like an SPG where the tenants don't pay any rent.

 

This is why the retail operations are more important than "just gravy".  They are sapping the value from the real estate until they can at least pay the frigging rent!  Real estate that collects no rent is worth quite a bit less than otherwise!

[Mephistopheles]

 

The bankruptcy remote subs are owned by the guarantors. So in effect, if shit hits the fan, they would go to the creditors.

 

And what would be the point of setting up a Non Guarantor Subsidiary and have it owned by the Guarantor Subsidiary?

 

Don't know, but that's how it's set up.

 

EDIT: Actually Kraven explained it earlier:

 

In terms of being bankruptcy remote I would say that has nothing to do with whether they are going to be spun off or not. It has to do primarily with the ability to issue obligations in ways where the credit and rating of the obligation is tied to the assets backing the obligation as opposed to the credit of the issuing entity. That is its typically a way for an issuer to get a higher rating on its obligations than it could get if it issued the obligations directly. There are a number of others reasons for doing it as well, this is just one.  By being bankruptcy remote it limits the concern that a bankruptcy of the SPE will draw the assets backing the obligations into the bk estate.

[20ppy]

Retail losing money in all future years: is this a fact? I don't think Eric meant he knows this for sure.

 

Bruce/Eddie is not seeing that SHLD is losing $10 per year on all future years. Sears made money the first few years and now lost money the last few years, but the gist is that it should make $$$ per year with retail if they liquidate/right size the stores to be profitable.

[ERICOPOLY]

Retail losing money in all future years: is this a fact? I don't think Eric meant he knows this for sure.

 

Right, I don't think it will happen for sure.  I lean towards it getting up to fully profitable over time.  That either happens through "retail transformation", or via liquidation.

 

It's that "over time" part that deserves a discount.

 

I do believe though that it is A FACT that for a period of time it (NAV) won't be earning what it should be earning -- this fact has been obvious for years now.  Bruce's NAV is useful to know what it is worth on the day that the assets earn their keep.  Meanwhile, we're not there yet.