Sears ‘Significantly Overvalued,’ Credit Suisse Says

Sears (SHLD) is sagging once again after the shrinking retailer reported financial results this morning.

Associated Press

Sears reported a loss of $402 million, much bigger than the year-ago loss of $279 million, while revenue declined to $7.88 billion, which beat analyst forecasts of $7.71 billion. Gross margins fell to 23.2% from 25.5%, while same-store sales rose 0.2%.

Credit Suisse analysts Gary Balter and Andrew Kinder tries to give Sears the benefit of the doubt:

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Some investors…believe that we are too negative on Sears Holdings’ outlook…So let's accept their math and take the low end of their assumed improvements. Based on that, we would add $1 billion to EBITDA from initiatives, which adding to trailing twelve months would give them positive EBITDA (yes you read that right) of $300 million. Here is the problem. The bulls on Sears argue for the most part that the value is in the real estate and brand names. If Mr. Lampert is trying to make it as an operator we should value them as such, but that’s a bigger problem. Using a positive $300 million EBITDA, that would imply a multiple of 29.5x lets say in 2017 to give them time for the turnaround. That would place their multiple well above anything we cover, including our best growth names such as The Container Store (TCS), Tractor Supply (TSCO)…Lumber Liquidators (LL), and CarMax (KMX). So if one accepts the turnaround and we give them an eight multiple of EBITDA three years out, a somewhat generous multiple for a non-top-line grower, then the value of the equity would be negative. H'mmm. Maybe the company should explore the asset sale. Said another way, this remains a significantly overvalued stock and while we are not moving to a negative target price, we maintain our $20 price target.

Shares of Sears have dropped 3.9% to $5.13 at 10:14 a.m., while the Container Store has gained 0.8% to $25.60, Tractor Supply has ticked up 0.2% to $64.07, Lumber Liquidators has risen 1.6% to $80.77 and CarMax is up 0.4% at $44.53.