Summary
Mr. Laing, the Barron's reporter who has previously been a major Eddie Lampert fan, (he estimated the "breakup value" of SHLD @ $300.00 per share in 10/22/07) has finally had the courage to provide a detailed account of why King Eddie has no clothes. Although he is correct in most respects, in the areas of real estate collateral values which is my area of expertise, he continues to be in denial.
Analysis
In the several places where he talks about break up value or the reasons for Eddie's failed exit scenario, he ignores what GLG readers have known since 2006, namely that Sears mall stores and Kmart's leased stores have a NEGATIVE VALUE! This one little fact accounts for over $12 billion of the original estimates of "hidden value" estimated by the former Lampert fans such as Greg Melich of Morgan Stanley, Gary Balter of Credit Suisse, William Dreher of Deutsche Bank and Mr Lampert himself.
Although Mr. Laing goes into great detail about SHLD's cash flow problems, profit problems and share values, he glosses over what I and other mall industry analysts have been saying since Mr. Lampert announced his personal estimate of Sears real estate value shortly after he merged it with Kmart in 2005. At that time Mr. Lampert publicly estimate his "hidden real estate value" at "over $12 billion". This was further substantiated many months later when Willam Ackman bought into SHLD and promptly announced Mr. Lampert was some $8 billion too low in his estimate of hidden real estate value.
The analysts, (Balter, Melich & Dreher) were quick to echo Messrs. Lampert and Ackman's silly comments and drove the stock price to $190 per share.
While I tend to agree with their revised (but still optimistic) estimates of approximately $33.00 per share, I disagree with the value of the real estate component they used to arrive at this number.
I continue to point to the fact that Mr. Lampert has already spent $155 million in store closing costs in the past 12 months with much more yet to come. Mr. Lampert has made no secret of the fact that he has over 300 "under performing" Sears stores that need to be closed. So far he has closed 40 at an initial cost of $4 million each. This does not take into consideration the continued cost of approximately $1 million per year for continuing charges of owned stores for such things as real estate taxes, CAM charges and insurance.
Read the article and keep in mind the fact that SHLD's "hidden real estate values" have now been proven to be a myth that should not influence the break up cost(other than to lower it) and do your own calculations. I would love to hear from any faithful readers as to what value they arrive at when the real estate is properly valued which the esteemed analysts refuse to do.
Kenneth Leonard consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
