Billionaire Eddie Lampert, the chairman and CEO of Sears Holdings Corporation (NASDAQ:SHLD), has purchased a significant amount of the company’s shares. He bought more than 332,000 shares at an average price of $40.89 per share, with the total transaction value of more than $13.5 million. After this purchase, he owns more than 42.6 million shares in the company, accounting for nearly 56.5% of the total shares outstanding. Could this move considered bullish? Should we follow him into Sears at the current price?
Investors who followed Lampert's previous purchase into Sears Holdings (NASDAQ:SHLD) in the beginning of 2012 have benefited from its share appreciation. In the middle of January last year, he accumulated around $150 million worth of stock at the average price of $29 - $31 per share. Just two months later, Sears advanced significantly to more than $82.50 per share. The huge share appreciation was also helped by the Hometown and Outlet stores spinoff plan that Sears disclosed to the public in February last year. This time, Lampert purchased Sears right after taking over the CEO position at the company from Lou D’Ambrosio. He mentioned in his CEO responsibilities: “I have agreed to assume these additional responsibilities in order to continue the company's recovery and sustain the momentum we are experiencing, as well as further the development of the management team under the distributed leadership model, which provides our business unit leaders with greater control, authority and autonomy."
Improving Performance But High Debt and Intangibles
Sears also recently provided updates for its fourth quarter operating performance. The adjusted EBITDA increased from $351 million last year to the range of $365 million and $465 million. The full year adjusted EBITDA should come in at between $560 million and $660 million, more than double the adjusted EBITDA of $277 million last year. For the full year, the retailer expected to book a net loss of $721 million to $801 million, including the non-cash pension settlements of $492 million. The EPS for fiscal 2013 should be in the range of $6.80 to $7.56 loss per share. In addition, Sears also said that it had reduced its net debt by $400 million as of December 2012. Indeed, Sears has been trying to reduce its debt over time, but the debt level still seems to be high. As of October 2012, it booked $3.84 billion in total stockholders’ equity, $622 million in cash, and nearly $3.86 billion in both long and short-term debt. In addition, Sears had a huge goodwill and intangible assets, as much as nearly $3.6 billion. Thus, the tangible book value is low, at only $2.6 per share.
A Real Estate, not a Retail Play
Bruce Berkowitz has also been interested in Sears. He has accumulated nearly 17 million shares in the company, accounting for 13.4% of the company. The investment in Sears was the real estate play, not the retail play. Sears was worth just the liquidation of its merchandise. So by buying Sears, investors would get everything else for free, the real estate, the brands. Putting the retail aside, Berkowitz pointed out the undervaluation. He mentioned that Sears had more real estate than Simon Property Group, Inc (NYSE:SPG), which was valued at more than 10x the current value of Sears.
Compared to its peers, including Target Corporation(NYSE:TGT) and Wal-Mart Stores, Inc. (NYSE:WMT), Sears didn’t have a decent operating performance. It reported negative operating margin, whereas the operating margin of Target and Wal-Mart were 7% and 6%, respectively. Sears had a high EBITDA multiple of 17.3x. Target and Wal-Mart have similar EV/EBITDA, of 7.61x and 7.72x, respectively. However, when growth is taken into account, Sears is the cheapest, with only 0.1x PEG. Wal-Mart has the highest PEG of 1.5x, and Target’s PEG is 1.17x.
My Foolish Take
Investing in Sears is not a retail play, but a real estate play. The breakup value of its real estate is certainly a lot higher than the current price. However, it would take time, and investors need to rely on management to unlock the hidden real estate value in Sears. I personally think Sears could be a decent investment opportunity for patient investors.
The article Is Sears a Decent Purchase Now? originally appeared on Fool.com.
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