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Pastimes : Clown-Free Zone... sorry, no clowns allowed -- Ignore unavailable to you. Want to Upgrade?

To: Bill/WA who wrote (192529)	9/18/2002 9:02:56 AM
From: reaper	Read Replies (1) \| Respond to of 436258

S is perceived to be a 'cheap' stock, since it trades at sub-10x earnings. the 'value' guys love it (of course, they loved MGIC too). but when you take a look at their return on assets, at sub-3%, you quickly understand that they are not a retailer but a credit card company which uses a bunch of old decrepit stores to solicit new credit customers. which means of course it DESERVES that low multiple. also, people LOVE this Land's End deal. all i have to say about that deal is that Land's End has very reliably over the last 7-8 years generated $35mm of free cash flow a year, and Sears paid $1.8 billion cash for it. If you do some quick math you can see that they could have earned a better return on that capital in money market funds. of course, since they have to BORROW the money to pay for Land's End, they will earn a return on capital that is less than their cost of capital on that deal. look, Sears IMO destroys value every day it is in business. but the capital markets keep giving them money. until a precipitating event comes along that causes the withdrawl of capital, Sears will do fine. if capital availability is ever withdrawn, Sears will be revealed to be swimming naked and the stock will find its place around book value, which is +/- $20. IF there is something wrong in the credit card portfolio (i'm not saying there is or isn't, as i don't know, but you can probably figure what my guess is) then we could have an Americredit/Metris/Providian on our hands, where the 'book value' rapidly evaporates and the equity has no logical floor. All IMO only. Cheers