Sears may be worth double what it's currently trading for, says a recent analyst report by one of the company's largest shareholders. The company's assets – particularly its real estate – are undervalued, according to the report.
In many ways, this is an ironic turn of events for its CEO, Eddie Lampert.
In 2002, Lampert was a hedge fund manager who began buying the debt of Kmart, then a bankrupted retailer. As the story goes, Lampert and his team went through a list of Kmart's real estate holdings to see what each one was valued at according to its local tax assessor's office. Tax values are often lower than the actual market value of a property. But the book value of Kmart's real estate would have been even lower than what it was assessed for given that the company had hundreds of properties purchased several decades before. Kmart's true value was therefore understated.
Fast-forward 11 years later and Lampert is now the CEO of Sears Holdings Corporation, the company Lampert formed when combined its namesake with Kmart (Lampert had a majority equity stake in Kmart when it came out of bankruptcy). The combined accounting value of its properties, plants, and equipment is about $5.7 billion while its market cap is $5.7 billion. However, the company's entire book value is $2.8 billion, reflecting $19.3 billion in assets versus $16.5 billion in liabilities.
But, according to a 139-page presentation recently done by Baker Street Capital, the real value of Sears' real estate is $8.6 billion, nearly $3 billion more than its book value. And, Baker Street believes that the trading price of $44 (which is where it was last week) is only one-third of their estimate of its breakup value.
In other words, after nearly a decade of control, Lampert's running of Sears as a retailer has caused an underestimation of its value, particularly its real estate. And that's what Lampert was supposedly thinking when he started buying all that debt back in the day.
So, is Baker Street right? Is Sears a true value play?
Looking at Sears' fundamentals is John Stephenson, portfolio manager at First Asset Investment Management. He has other ideas about Sears' value, particularly when it comes to real estate.
"Let's assume that you get a few marquee properties that get full value," says Stephenson. "Great, buy you're not going to get full value for all of them."
Checking the charts on Sears is Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson. He also is skeptical about the real estate claim.
"If you want to make a real estate play, buy a real estate company," says Ross. "Buy a homebuilder or a Home Depot or a Bed Bath and Beyond. Don't in through the back door with Sears."
To see more of Stephenson and Ross on what they think of Sears' valuation and where they see the stock going, watch the video above.