SHLD?

[biaggio]

I am planning on selling my rights to purchase SHOS.

 

I am trying to figure out why I am wrong.

 

To me SHOS is bad because:

 

i not a good business- operates in highly competitive retail market. Does not have any enduring competitive advantage that I can think of. Same store sales shrinking.  Profit shrinking but would probably improve with improving economy.

 

ii Valuation

- not a big if any MOS

- EV will be ~ $436 million. Free cash flow projected at ~ $38 million- then projected to fall afterwards.

-I am getting liquidation value closer to ~$2 per share (minimal cash, Accounts receivable x 0.9, inventory x 0.6, property x 0.2,  less about $214 million in total debt divided by 23 million shares)

 

I like SHLD a tiny bit more after the sale as they will get ~ $400 million for crappy business +  it appears they are working towards some sort of plan to show/create shareholder value i.e close the gap between the value posters saw in the company at the beginning of the thread vs the current share price.

 

Disclosure: SHLD is a very small holding as I have never enough conviction to average down.

 

Would not be surprised if above is wrong. Would be interested what others are thinking, especially those who will be getting a rights offering.

 

Edit: http://www.searsholdings.com/invest/docs/SHO_Amendment_No_8_9.6.2012.pdf for those interested

[Guest rimm_never_sleeps]

so you think liq value is $2 a share? with 23m shares out that means you believe the liq value is $46m? how do you reconcile that with pro forma s/h equity of $440.5m, or $19 a share?

 

how do you calculate $214m of total debt? From page f-23 of the sep 6 s-1, I get around $106m.

 

You do point out that fcf is projected to decline in 2014. but you fail to point out the reason why. it's not because the business is projected to decline. it's because of a projected incremental investment in cap ex of $15m beyond the approx $11m of historical maint cap ex. however, EBIT is expected to increase from $44m in 2012 to $92m in 2014.

[biaggio]

so you think liq value is $2 a share? with 23m shares out that means you believe the liq value is $46m? how do you reconcile that with pro forma s/h equity of $440.5m, or $19 a share?

 

how do you calculate $214m of total debt? From page f-23 of the sep 6 s-1, I get around $106m.

 

You do point out that fcf is projected to decline in 2014. but you fail to point out the reason why. it's not because the business is projected to decline. it's because of a projected incremental investment in cap ex of $15m beyond the approx $11m of historical maint cap ex. however, EBIT is expected to increase from $44m in 2012 to $92m in 2014.

 

Thanks RIMM

 

re liquid value- Do I think its $2- I have no idea exactly what it is but I would like the calculation to be closer to or more than the $15 purchase price.

 

How do I reconcile the difference in the share holder value -I think the difference is good will of $166mill + other assets  which I assigned a value of 0.

 

re other assets-do you know what's in here- I did not see a disclosure on this. When I read these things I am not reading word for word as they are so bloody long, so I probably missed something.

 

re total debt- I was looking at the balance sheet as of Jan 2012 which showed total debt of $113 million + then I added $100 million that they are going to borrow and dividend to parent company just before the sale. I was just looking at the S1 again + I notice their April 2012 balance sheet on F23 shows total debt of $229.6 million which appears to include the $100m

 

re projected FCF - personally I have no idea- I am using their numbers- page 156 management projections of FCF of $25.7 million

 

I like the deal from SHLD point of view but not so much as a buyer of SHOS. I have been wrong or just early on SHLD so far, so what do I know (I am not being sarcastic here).

 

RIMM or anyone else think differently?

[Guest rimm_never_sleeps]

Your stated liquidation value is $46m vs pf s/e of $440m.  gw and oa are less than $200m. It seems like you are still just arbitrarily haircutting the value of the assets and saying the result is your liquidation value, at the same time giving zero credit for gw and oa. But proper business valuation is not simply about making arbitrary haircuts.

 

One often gets poor investment results in overestimating the value of a business. One can also get poor results by dramatically underestimating the value of a business.

 

The banks are granting this company a secured credit line of $250m, which is 5 times your liquidation value. Indeed, even doing a liquidation analysis that results in a valuation of $46m, when the company itself projects operating earnings of over $90m in two years, strikes me as an odd interpretation of the supplied data.

 

I can understand performing a liq analysis on a money losing, debt heavy company that can't make it's interest payments. But this company isn't anything like that. The IB which was hired to appraise the business (and certainly not encouraged to high ball it), ascribed a minimum current value of $345m for the equity.

 

You seem to be confusing term debt with total liabilities (which includes term debt and operating liabilities). Analysts don't lump operating liabilities together with term debt for the computation of enterprise value. The company will have $106m of term debt. Not $214m.

 

I realize you have no idea, and neither do I, about future fcf. However, it's one thing to point out that fcf is set to decline. But it helps, for valuation purposes, to understand why. If management decides not to make an incremental $15m investment in cap ex in 2014, fcf would be $41m. This business is projected to get way better. But your comment that fcf would be lower in 2014, without understanding and then stating why, is misleading.

[biaggio]

RIMM,

 

Very good points:

-banks willing to extend line of credit of $250 million. (maybe because ESL + E. Lampert backing deal?? or because it will be secured by specific asset)

-one can also get poor results by dramatically underestimating the value of a business- I have been guilty of this for sure (but probably wise to error on underestimating with a average or poor business)

 

My liquidation valuation was just one way I look at investment. i.e worst case scenerio? I discounted receivables by 10%, inventory by 40%, "property" by 80%- yes they are arbitrary---I was just trying to get rough estimate.

 

Truer estimate of valuation probably close to that based on FCF- I can buy that--the decrease FCF I stated was their estimate not mine. That would be consistent with the trend recently.- on the other hand maybe being independent from SHLD will allow management to be more entrepreneurial + competitive.

 

One of my handicaps is that I am not familiar at all with these stores in the U.S. All of my family + friends think of Lowes, Home Depot, etc and don t even think of Sears Home...

 

I think I probably calculate EV improperly (market cap + debt - cash), this has pointed out to me once before---if analysts use LTD I stand corrected (I did not understand why they would not use total debt? I am guessing it be that some of the operating debt is backed by operating assets like receivables or inventory .

 

Never the less still does not seem like a real bargain. Seems like a fair business at fair price, no?

 

As a SHLD shareholder paying their fee I would hope for or expect fair to a high valuation. My limited experience with these "independent" valuations give me that impression as well.

 

Thanks again RIMM for taking the time to post reply-

 

Hey are you buying SHOS? Just curious.

 

[Guest rimm_never_sleeps]

if it has $91m of ebit in 2014 the stock could be near $30. that's a big if. yes I will be a shareholder.

 

fyi: operating liabilities do not equal "debt" for our purposes. the banks are lending based on their perceived value of the assets.

[txlaw]

http://www.ctvnews.ca/canada/nordstrom-to-announce-expansion-plans-for-canada-1.951278

 

Let's see if they take down some SHLD Canada real estate.

 

And speaking of store within a store strategies . . .

http://www.sacbee.com/2012/09/10/4805248/topshop-and-topman-open-today.html

 

Actually, looks like Nordstrom is just selling the Topshop brand.

[Kiltacular]

Not really a shld post, but anyone notice that "JOE" is hitting 52 week highs.

 

 

[dcollon]

News headline this morning on SHLD:

 

FTC grants antitrust clearance for transaction between Ed Lampert's ESL Partners and Sears Holdings

Monday, September 24, 2012 09:04:31 AM

 

 

While the FTC does not disclose the nature of the transaction, StreetAccount notes that antitrust clearance is required when investments reach certain thresholds based on the size of the target company.

StreetAccount notes that Lampert has been active in buying the stock in the last month, disclosing a 2.4M share purchase on 6-Sep.

[finetrader]

BB in wealthtrack talk about the history of anchor store. Here's a definition that might help understand what it is all about.

 

 

http://en.wikipedia.org/wiki/Anchor_store

[racemize]

here's the BB presentation from the other thread:

http://www.fairholmefunds.com/sites/default/files/120815%20SHLD%20Presentation.pdf

 

Shouldn't we move this whole thread over to the investment ideas?

[Evolveus]

This may be old news as its dated October 22nd, but it looks like SHLD holders will be receiving shares of Sears Canada with SHLD lowering its ownership to 51%.  It's nice to see some tangible evindence by Lampert to start unlocking the value embedded in the Holding Co.

 

http://www.benzinga.com/news/12/10/3015494/sears-holdings-approves-partial-spin-off-of-its-interest-in-sears-canada

[BargainValueHunter]

Lampert continues to remove shares from the public float...

 

http://seekingalpha.com/article/1246711-sears-holdings-corp-finds-a-strong-investor-in-ceo-lampert?source=feed

 

Lampert directly purchased 1,239,056 shares of SHLD on March 4, 2013. At a purchase price of $44.36, this transaction carried an atypically large value of $54.97 million. Already a 10% owner in the company, Lampert now directly owns a total of 25,041,046 shares of common stock. Additionally, he indirectly owns another 33,856,069 shares through various partnerships.