After the plummet Sears Holdings (
) experienced since late 2011, value investors like myself have
begun to kick the tires and see if Sears might have been
irrationally bid down.
click to enlarge
I usually look at large national brands or companies that are
still profitable whose stock has begun trading deeply below a price
to book ratio of one (i.e. their stock is trading for less than
their shareholder's equity ((
)) on the balance sheet). After a company like Sears is selected
(P/B of 0.48), I look at what exactly the assets are that I would
be getting. This is due to the fact that in terms of SE on a
balance sheet, a dollar of cash is valued the exact same as
goodwill from an acquisition, even though in bankruptcy court cash
is far more valuable than goodwill.
So what do we get right now with a share of Sears? Here's the
In this chart I've paired up assets listed in order of reported
liquidity on the left hand side and the stakeholders of the company
in order of most secured (since all liabilities are more senior to
stockholders, I have not broken out liabilities).
As we can see, once you start looking at shareholder's equity,
you're getting a little bit of property and equipment, but almost
excluisively goodwill, trade names/other intagibles, and other
Essentially, if you're buying Sears shares as an asset play,
you're getting most of the assets that go out the window in a
bankruptcy proceeding. Presuming Sears was able to get every dollar
stated in the more liquid assets in a bankruptcy liquidation (very
unlikely, especially for line items like inventory), you'd be
entitled to every dollar in excess of $5.4B received for the sale
of property and equipment (line item value of $7.0B). Sears posted
a market cap of $3.59B on 1/13/11.
However, if Sears were only able to get $0.87 on the dollar or
less for non cash items (throwing away deferred income taxes of
$96M which would be worthless in a liquidation), sales of property
and equipment would have to completely exceed their $7.0B book
value before investors saw a dime.
In a liquidation, goodwill and intangible assets are worthless
unless subsidiaries of the Sears Holdings' business were able to be
sold off separately prior to liquidation. Assuming we throw that
value out the window, at the $0.87 recovery stated earlier, Sears
would have to sell property and equipment at 56% more than it's
line item value before investors realized a return on the $3.95B
market cap of Sears. If we get to a recovery scenario of $0.60 for
the items mentioned above, Sears would have to unload property and
equipment at more than 100% above the line item value before
investors saw a return.
Obviously shareholders may have expectations that Sears Holdings
will return to profitability, or that the break up value is worth
dramatically more than what the book value of the assets reveal.
However, for a company like Sears that has been struggling for so
long with exceptionally strong competitors and practically no
strategic moat especially in the context of online retailers, the
end game (Chapter 7) for Sears looks absolutely terrible for
prospective investors. I do not consider SHLD to be a good prospect
for deep value investors.
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
Stock Outlook: The Final Straw That Breaks The