November 8, 2007

An Estimate of Sears' Value

Analyst Seth Sigman of Credit Suisse calculated for the first time values on Sears Holdings' (SHLD) [Click to launch this SmartLink] property and brands.

In a report issued Tuesday he estimated values as follows: real estate, $9.5 billion to $11.5 billion; leased stores, $1 billion to $2 billion; distribution centers, $700 million to $1.1 billion; Hoffman Estates headquarters, $200 million to $400 million; private brands, such as Craftsman, Kenmore and DieHard, $3 billion to $5 billion; Lands' End, $2.2 billion to $2.8 billion; and home services business, $2.8 billion to $3.5 billion. Total? $19.4 billion to $26.3 billion.

That is just the value of the land and the brand's, it does not include the results of the retail operations which contributed $2.5 billion last year. Sears current valuation on the market? $18 billion, 7% below even the lowest estimate of just it's real estate & brand value and 46% below the highest.

Currently shares trade at $127 and there are less than 140 million of them outstanding (we will know exactly how many Lampert has repurchased soon but he may have bought 10.4 million back). If we were to value Sears just on the brands and not on it's operations, we get a share price of $137 to $185. We also have to value the operations and that gives us an additional $9.47 a share for the past 12 months giving us a price range of $145 to $194.

The important point is that this valuation include NO premium for either the brands, property or earnings. It is a flat valuation of the parts and a years earnings. What type of valuation do we give the capacity of Lampert to monetize the brands or the property?

Sears is trading at 13 times its current earnings, at the lower end of the retail spectrum. Consider Wal-Mart (WMT) [Click to launch this SmartLink] trades at 15 times, Target (TGT) [Click to launch this SmartLink] 17 and Macy's (M) [Click to launch this SmartLink] 18 times. If we add the value of the property and brands we can effectively double its current share price. The issue for the market currently is that the value of those items will not filter into the stock price until Lampert unlocks that value. If Lampert decide to sell or lease the land he owns, the value of that then filters into the stock price. If he licenses the Craftsman or DieHard brands, that value then filters into the price. Without anyone knowing what his plans are, investors are hesitant to make a leap of faith and assume he may take a certain course.

Thus the "hidden value" in Sears shares... Lampert is smart and will not sit tight forever. My guess is he is buying as much stock as he can at these prices while he can before he moves....

It's alright, I got time...

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