Sears...A Reader Submission.

26 Nov 3:48am
Posted by ToddSullivan
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Reader Justin submits: Why Sears (SHLD) is NOT going bankrupt?

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In this volatile market, anyone can say anything to put downward pressure on a stock. In many cases deserved, in some cases absurd, and in the case of Sears a little of both.

Let’s start with the deserved part. Obviously, retail is doing terrible this year as an investment. However, the woes at Sears go beyond the macro environment. They have made bad decisions in some cases, suffered from management turnover, and communicated very little beyond what’s required by a public company. On top of that, they recently lost a well-respected, activist shareholder, Bill Ackman. Bill has taken an absolute beating on his investments in Sears, Target, and Borders, so he may have had about all the fun he can handle in retail. In short, it hasn’t been all that pretty, but the shares reflect much worse.

The absurd is the idea that Sears has some kind of solvency risk as some have floated. Why is this absurd? Here’s my case:

1. Last quarter Sears generated FCF (free cash flow) of over $400 million. Target, a “good” retailer actually had no FCF last quarter, they burned over $900million. In fact, Target hasn’t generated FCF in the last 3 quarters. Over the same time frame Sears generated a staggering $1.5 BILLION in FCF. So yes Sears is making money hand over fist in this environment even with mediocre execution.



2. Eddie Lampert’s investment fund ESL owns over 50% of Sears. And Sears makes up over ½ his fund. And his fund is still making investments in other equities. Now if you are thinking that ½ your fund may evaporate into insolvency or you are worried about investor redemptions then you preserve cash if not generate cash by selling positions. What you don’t do is make more investments, which is what he’s doing.



3. Sears announced the purchase of additional shares of Sears Canada in November. Why spend your cash on buybacks and now additional shares in Sears Canada if you are worried about your cash position?




4. I’ve been to several Sears and Kmarts in recent weeks and they are all hiring.



In conclusion, Sears is hiring people, buying shares in, generating FCF, and ESL continues to make investments. None of these indicate to me that there’s any solvency concern by the controlling shareholder.




Disclosure ("none" means no position):Justin is long SHLD
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About

ToddSullivan

A Massachusetts based value investor, I look for companies whose current valuation is at a discount to their true value. When I purchase a stock, my typical holding period is several years. I consider buying a stock purchasing a piece of a business. I am confident once I make a decision to buy that eventually the market as a whole will recognize the true value of the business and value it accordingly. It may take 1 month, 6 months or a year, but if I buy it at enough of a discount to its true value my results will be (and have been) superior to the market as a whole. Of all the disparate investing disciplines, value investing has stood the test of time. The great investors of have all been value investors. Warren Buffett, Ben Graham, Bill Ruane (Sequoia Fund), Bill Miller and Wally Weitz, all have consistently outperformed the market for decades by using various forms of value investing. Currently I am a contributing writer to Seeking Alpha, Vinvesting.com, The Stock Masters and Value Investing News. Posts have been reprinted in The Wall St. Journal, Yahoo Finance, Google Alerts, Google Finance, TheStreet.com. 24/7 Wall St. and Topix.net.

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