Sears Holdings Corporation (NASDAQ:SHLD)
The company merged with K-mart in 2005, soon after beginning a long stretch of declining revenue. Free cash flow turned negative in 2010 and has remained negative since. The turnaround was being led by CEO Louis D’Ambrosio, who announced in January that he would stepping down. This adds an extra element of uncertainty to the turnaround effort.
Sears’ bonds have been on the rise over the past year, but they still offer high yields. The 6.875% bond maturing in 2017 last traded at $91.51, up from around $70 one year ago (CUSIP: 812404AY7).
SHLD Bond Price
Source: Finra
This bond pays semi-annually and is continuously callable, irrelevant as long as the price is below par. The yield to maturity of this bond is calculated below.
This Sears bond has a yield to maturity of just over 10%, slightly below the JCP bond above. Sears and J.C. Penney are in similar financial states. Sears has $622 million in cash compared to $6.2 billion in debt and debt-like obligations, including pension liabilities. The company paid $289 in interest last year with a free cash flow of $-707 million.
I’d argue that Sears is in a worse condition than J.C. Penney, with more debt and less time for the turnaround strategy to stick. Again, if you believe the turnaround will be a success then the bond looks attractive. But I think J.C. Penney has a better chance than Sears.
RadioShack Corporation (NYSE:RSH)
I wrote about RadioShack in December, pointing out that the company was trading at less than its current assets minus total liabilities. This is what famed value investor Ben Graham called a Net-Net, and is usually an indication of an undervalued stock. Since the time of that writing the stock has risen from $2.38 to $3.27, a 37% increase in about two months. If only I had listened to my own advice.
Radio Shack has the highest-yielding bonds of the three companies. The bond maturing in 2019 with a 6.75% coupon last traded at $70.36, up from around $60 a few months ago (CUSIP: 750438AE3).
RSH Bond Price
Source: Finra
The yield to maturity calculation for this bond is shown below.
Although the RadioShack bond has a yield to maturity of over 15%, far higher than both J.C. Penney and Sears, I would argue that the company is in the best financial situation of the three. With $546 million in cash and $749 million in debt the company almost has enough cash to cover its debt. RadioShack’s balance sheet is the strongest of the three companies by far. The company paid $47 million in interest last year while their free cash flow turned negative in the middle of 2012. Still, as long as the losses don’t accelerate the cash position should sustain the company for far longer than J.C. Penney or Sears. Radio Shack has by far the lowest default risk even while offering the highest YTM.
Financial data from Morningstar
The article High-Yielding Troubled Retailer Bonds originally appeared on Fool.com and is written by Timothy Green.
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