Stock Has More than Doubled Since January 2012
The signs of failure of hedge fund manager Edward Lampert as CEO of Sears are everywhere. The Company is hemorrhaging cash and having to sell assets to build its cash levels back up to a safe level.
For the year, Sears reported a loss of $3.14 billion, a number that included $2.7 billion of charges, compared with a profit of $133 million for 2010. The fourth quarter had a $2.44 billion loss, compared with a profit of $382 million the previous year.
The Chairman of Sears, Mr. Lampert and his hedge fund own about 61% of the company. And since he has become chairman, Sears has not done all that well.
The company also reported an annual decline in revenue, its fifth in a row. Such trends are a stark reminder that Sears’s problems have deepened since it came under Mr. Lampert’s control.
Critics say that under Mr. Lampert the company has not spent enough to update its stores and that now, in the face of intense competition, Sears is in danger of permanently falling out of shoppers’ favor.
Pure speculation would say that when those hedge fund managers who have large egos (all of them do) try to actually operate a business they fail miserably. And that’s what seems to be happening with Mr. Lampert. The company has a great number of assets, and like every other entity, both personal and business ones, get into trouble they start selling those assets.
One of the asset sales appears to be in the bag. General Growth Properties, a mall operator, has agreed to buy 11 Sears properties, which will raise $270 million.
However, the other deal — which aims to raise as much as $500 million and is slated for later this year — is less straightforward. In effect, Sears aims to sell its smaller Hometown and Outlet stores to any interested Sears shareholders. The company said Mr. Lampert’s hedge funds expected to participate and exercise their rights in full.
But the danger is that Sears may be selling some of its best properties, which could mean even worse operating results in the future. On the conference call on Thursday, a Sears executive declined to say what proportion of its stores was profitable.
This story raises even more red flags, Sears is going to sell very profitable stores to Mr. Lampert’s hedge fund. Really, what possible conflict could exist there? But the really interesting part of all of this is the stock price, which has increased dramatically since the beginning of 2012.
Shares are up 6% at $65.41. The stock is up 106% in 2012, the top performer in the S&P 500. Netflix is the only other stock within the index that has had at least a 50% run-up this year.
What possible explanation could there be for that? Well it could be that investors are not all that bright. See, EBITDA is positive if you don’t list all of the expenses.
Sears said it had $277 million of adjusted earnings before interest, taxes, depreciation and amortization, or Ebitda. But Ms. Ross Gilbert said that excluded $383 million of cash contributions to its pensions. Including that would put Ebitda deep in negative territory. And if Sears’s top line continues to decline, the loss could be even deeper this year.
But not everyone is fooled.
The sharp rally still hasn’t prompted Credit Suisse analyst Gary Balter to change his stance on Sears.
“We believe the equity valuation is well out of line with comparable retailers,” he says, while reiterating an underperform rating and $20 price target.
Sears’ transformation and planned asset sales “buy time, they do not buy success,” Balter adds. “They are steps in the right direction but we believe that the hole that has been created will not be as easy to climb out off as investors believe.”
Balter says the stock remains “very expensive” based on traditional measures and would take more than a six-fold increase in EBITDA to come in line with its competitors.
“Investors need to separate liquidity concerns from valuation, with our near term focus being much more on valuation,” he says.
Good analysis there, and it is free! So what explains the huge rise in Sears stock? Well, a lot of Madoff investors have gotten some of their money back, and they have to invest it someplace, don’t they.