ESL Investments, a hedge fund managed and founded by billionaire Eddie Lampert, focuses on service sector equities. As of June 30, the fund’s top holdings include AutoNation, Inc. (NYSE:AN), The Gap Inc. (NYSE:GPS), and AutoZone, Inc. (NYSE:AZO), all of which you can view here. On September 4, Lampert increased his stake in Sears Holding Corporation (NASDAQ:SHLD) by nearly $127 million at $52.75 a share, according to a regulatory filing. Shares jumped two days later by over 9 percent and are trading at above $56 a share.
This new move gives Lampert a 64 percent stake in the company, which has recently been aching from debt downgrades and earnings shortfalls. The company reported a $29.15 per share loss for fiscal year 2012, but analyst consensus has the company improving to a $3 per share loss in fiscal year 2013. The company’s shares are trading at 1.2 times book value; Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) shares have price/book ratios of 3.5 and 2.6, respectively. While the latter two companies have price/sales of between 0.5 and 0.6, Sears has a price/sales below 0.2.
So, assuming a stable improvement of the company’s finances, along with a substantial sales turnaround, Sears looks like a good value play at below $60 a share. Purchasing activity from Lampert at this higher price range is also very significant. Earlier this year, the Sears shares Lampert acquired on the open market were purchased for between $31 and $32 a share, meaning that Lampert sees something new in the company’s valuation as he purchases in the $50s. The company has decent brand-recognition with lines like Kenmore, Craftsman, and DieHard.
Last quarter, Sears shares met management earnings guidance for the second quarter, losing $0.86 per share, an improvement from the $1.18 loss at the same time last year. The new CEO Lou D’Ambrosio has voiced his commitment to the “new Sears.”
The company’s financial outlook does look more positive as well. At the beginning of 2012, Sears’ current ratio, which measures how well a company can settle debts over the short-term (current assets divided by current liabilities), was 1.11. In the most recent quarter, the company increased this to 1.13, which, though below the 3-year average of 1.25, is still a step in the right direction. Revenues decreased by about 5 percent for the first half of 2012; they dropped a total 5.8 percent in fiscal year 2010, during which time shares did decline by 12 percent but were never trading below $60. The company reported in its second quarter earnings report that it had $3.1 billion in liquid assets, so there is enough liquidity to support management’s objectives in the short-term.
The company owns a hefty 60 percent of its full-line Sears stores and owns 15 percent of its Kmart stores. It sold 11 full-line stores to General Growth Properties Inc. (NYSE:GGP) for $270 million in April and reduced its controlling stake in Sears Canada Inc. (TSE:SCC) to 51 percent. Sears Holding is heavily exposed to the broader market; Sears’ appliance business accounts for 16 percent of its overall revenue.
Bruce Berkowitz’s Fairholme (FAIRX) owns about 15.8 percent of Sears Holdings and has laid out a value case for the company (view the funds holdings here). The company’s real estate valuation has been a source of debate, but Berkowitz is convinced in its long-term value. One commentator believes that the sum-of-the-parts valuation of Sears brands comes out to over $20 billion—perhaps a little optimistic. That said, with significant brand development from its new CEO, Sears stands to make its best shot at competing with online retailers and other big-box retailers.