Sears holding is in the retail business. . It offers home appliances, tools, lawn and garden products, home electronics, clothing and automotive repair and maintenance products. The company sells its products in various brands, including Kenmore, Craftsman and DieHard, Lands' End, Jaclyn Smith, Martha Stewart Everyday, and Joe Boxer, as well as the Apostrophe and Covington. As of December 6, 2005, the company operated 3,900 full-line and specialty retail stores in the United States and Canada.
Sears Holding is run by Eddie Lampert, considered as a clone of Warren Buffett. He holds a very good track record in increasing earnings. He shot to the limelight with his deal for Kmart, where the real estate was more valuable than the company. He then bought Sears which only increased the buzz. Currently Sears is in talks to buy the rest of Sears Canada. Sears is in the retailing business. Let us quickly take a look at Sears balance sheets to see how it compares to Berkshire.
As per the latest 10-Q, Sears holding has an operating marging of .98%. This is lower than both Walmart (5.8%) and Amazon.com.
In the latest 10-Q, Sears holding had 163.6 million shares outstanding. The share holders equity was 10.945 billion. Dividing the share holder equity by total shares outstanding, one gets a value of $66.9/share. This is the liquidation value of the enterprise.
Cash flow from operating activities increased 12.2% year over year. Let us discount this slightly and say that cash flow from operations will increase by 12% a year for the next five years. SHLD's operating cash flows were 193 million for the first 39 weeks of 2005. Pro-rating this over 52 weeks, one gets an annual cash flow of 253 million/year. This number is likely a conservative estimate as most retailers have better cash flows during the X'mas season. With a discount rate of 8%, this adds to the bottom line of another 9 dollars a share. In total, this brings the underlying value of the share to 76 dollars a share. Even if one adds the premium for the Sears brand and Lampert ( who got great press ) to the tune of $20/share, we are looking at a price of $96/share.
The stock is currently trading in the 120 range. The median analyst target for this stock is $170/share. They are expecting earnings of 6.05/share in 2006 and 7.49 in 2007. Looking at the balance sheets, the earnings of SHLD is highly unpredictable and is likely fluctuate a lot. The operating earnings are unlikely to provide a fillip to this stock. It is more the investment prowess of Eddie Lampert that will make the difference. The stock doesnt look attractive at current prices. The stock is more attractive as a buy when it dips below $100.