Lampert is chairman of Sears Holdings Corporation (NASDAQ:SHLD), and together with his investment firm, ESL Investments, is the largest shareholder of the retailer. Lampert owns over 25 million shares and ESL some 36 million shares, together they control 56.5% of the company. Lampert focuses on the retail sector, with other investments in notable retailers Gap, AutoZone and Big Lots, but he has been struggling with Sears of late given the poor economic back drop (check out ESL’s newest picks). So is Sears worth investing in given Lampert has increased his stake? I remain hesitant and believe there are too many headwinds afoot, including notable competition.
Fellow fund manager Berkowitz believes
It appears that Lampert also has notable hedge fund manager Bruce Berkowitz as a backer. Berkowitz has previously discussed the value he believes that Sears Holdings Corporation (NASDAQ:SHLD)’s real estate holds (see all hedge funds owning Sears). Berkowtiz’s Fairholme Fund owns 18.1 million, or over 17% of the retailer. So why trust Berkowitz? Well he was was named “Stock Manager of the Decade” in 2009 and his Fairholme Fund has managed to to return 1.02% per month since September 2000.
Per Berkowitz’s case study of the company, he believes the real estate value alone is worth upwards of $115 per share, that’s 130% above where the stock is currently trading. He has also been sure to point out that Sears has more commercial square feet than Simon Property Group, Inc (NYSE:SPG), but Simon still manages to trade nearly ten times the market cap.
Other potential investor interest includes speculation that the commercial REIT, Vornado Realty Trust (NYSE:VNO), could be looking to trade its J.C. Penney shares it sold for a position in Sears (read more about the sale).
The Sears business
Sears Holdings Corporation (NASDAQ:SHLD)’s key segment, Sears Domestic, accounts for over 50% of Sears’ revenue. This includes its staple stores that are located in malls and average over 130,000 square feet. These stores offer a variety of products, from apparel to appliances. Kmart still generates some 35% of revenue, which is not good, as this business is seeing immense pressure from Wal-Mart Stores, Inc. (NYSE:WMT). Both segments continue to see weakness of late. Sears’ domestic comp sales were down by 1.4% for the whole year 2012, while Kmart’s comp store sales were 3.7% lower.
Target is expected to start cutting into Wal-Mart’s market share as it focuses more on consumable items should boost sales and earnings in a sluggish consumer environment. However, I think both Wal-Mart and Target Corporation (NYSE:TGT) will continue to dominate Sears Holdings Corporation (NASDAQ:SHLD).
One thing that both Wal-Mart and Target are moving toward are smaller stores, which will be easier to access and navigate for customers. Target Corporation (NYSE:TGT)s smaller store plans include a 60,000 to 100,000 square foot complex, where the average 125,000 to 180,000 square feet for current stores.Target is a bit less diversified with respect to its geographical span, operating in limited markets, but it is looking to open stores internationally, including in Canada and Latin America. The company plans to open 125 to 135 stores in Canada by 2013 and 2014. Wal-Mart operates on a very large scale and should continue putting pressure on Sears. The retailer also operates the warehouse retailer, Sam’s Club.
To give you an idea of the scale that Wal-Mart and Target Corporation (NYSE:TGT) operate on in comparison to Sears, just look at how their revenues stack up. Sears generates some $40 billion in revenue, Target $73 billion, while Wal-Mart generates a whopping $469 billion. Sears also only operates some 4,000 stores, compared to Wal-Mart’s 10,700.
Let’s have a look at some numbers
Based on valuation, Sears appears to trade well below a couple major peers…
Price to Sales
Sears 0.1x
Wal-Mart 0.5x
Target 0.5x
Wal-Mart 0.5x
Target 0.5x
But is the stock cheap for a reason? Quite possibly so, based on the company’s ability to lose cash and generate a negative return on investment:
5-Year Cash Flow Growth (Historical)
Sears -44%
Wal-Mart 6%
Target 3%
Wal-Mart 6%
Target 3%
Return on Investment (5-year average)
Sears -13%
Wal-Mart 13%
Target 8.5%
Wal-Mart 13%
Target 8.5%
The numbers don’t get any better when looking at how Wall Street expects the business to perform.
5-Year Expected Earnings Growth
Sears -164%
Wal-Mart 9%
Target 11.5% Don’t be fooled
Wal-Mart 9%
Target 11.5%
Don’t be fooled
Sears does have some support from other major hedge funds, but not the support of Wall Street. The average Wall Street price target is $17, which is 65% downside, and Wall Street expects a negative 164% annual EPS growth rate over the next five years; it’s tough to own Sears right now. The news has been well circulated that Sears has inherent value in its real estate portfolio, but it appears the market doesn’t really care. In reality, the real estate may well be a moat, but there is not a “catalyst” that will move the stock higher. The company also has $40 per share in debt and I’m not willing to invest on its real estate value alone.
The article Follow Billionaire Eddie Lampert’s Lead at Sears? originally appeared on Fool.com and is written by Marshall Hargrave.
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