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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Sears Holding Co.

August 7th 2009 Sears
Nasdaq Symbol: SHLD
Industry: Retail
Price as of 8/7: $77.80

The three worst words to hear for a kid in the middle of the summer are; Back to School. It's back to school time for the retail sector as they gear up for the August boost in sales. Most economists are predicting a long drawn out recovery to the economy with limited consumer spending. The good news is most economists are typically wrong. The retail stocks have been trading sideways for the last three months while the rest of the market is finally coming to life. Have you seen the financial sector lately? The retail sector posted solid July sales this week and most will report earnings later this month which won't exactly paint a pretty picture, but the fundamentals are and will continue to improve. The housing numbers have slowly improved helping lift retailers like Home Depot and Lowes. I recently purchased a home and have spent a lot of money at those two retailers and also this weeks' feature company, Sears. Sears has their hands in a number of retail sectors like selling refrigerators, washers, dryers, craftsman tools and tractors, patio furniture, flat screen TVs, and clothing lines through such brand names as Lands End. My personal experience has been very good particularly with the customer service which is one reason I feel comfortable featuring Sears.
This is not your fathers Sears Roebuck company. Financier Eddie Lampert bought Kmart in bankruptcy brought it public once again and made billions selling off real estate property. Eddie Lampert made enough money to buy Sears, bringing it into his mix. The stock had a phenomenal run up to $184 a share before the bear market finally sunk their claws into the retailer. Last quarter Sears reported a profit of 38 cents per share or $47 million. Excluding non-recurring items, earnings beat by $1.26 a share. Revenues fell 9.2% to $10.05 billion, in line with consensus. Gross margins improved to 28.6% vs consensus of 26.8%. The better than expected results were due largely to cost cuts and lean inventories. The company has also done a good job improving the balance sheet with $1.2 billion in consolidated cash while reducing consolidated debt to $3.0 billion from $3.5 billion last year. Many retailers have much bigger debt loads. For example, Target has $18 billion in debt and Walmart has $43 billion in debt.
Recently, Sears has used some of their cash flow to buyback stock which has performed well. The stock has doubled since the March lows. Valuing Sears stock is a little tricky. On some metrics, the stock is expensive trading for 31 times this years earnings and 38 times next years numbers. However, on other metrics the stock is cheap trading for 0.18 times sales and less than book value of $77.71 a share. As the economy improves this year, investors will gravitate toward economic sensitive stocks likes commodities, finanicials, and retailers. Sears stock has jumped over 15% this week so it's not as cheap as last week, but Sears is well positioned to benefit from improving home sales, back to school sales, and the improving economy.