Sears Ups Buyback Program to $1.5B

Sears Holdings (SHLD) announced today that its Board of Directors has approved the repurchase of up to an additional $500 million of the company’s common shares. This authorization is in addition to the $30 million worth of shares that remain available for repurchase under the $1 billion share repurchase program previously announced. Since initiating that program in Sept. 2005, Sears Holdings has purchased approximately 8.0 million of the company’s common shares at an average cost per share of $120.86.”

That is the first paragraph of a Sears Holdings press release issued Wednesday morning. One of the most attractive aspects of owning Sears stock is the fact that as of December 31st they had $4.44 billion in cash on the balance sheet, which equates to $28 per share, or more than 20% of the company’s equity value. Share repurchases are one of the main tools Eddie Lampert and Co. will use to convert store cash flow into higher earnings per share, which will subsequently create quite a lot of shareholder value.

Unlike Cisco (CSCO) and Intel (INTC), they aren’t buying back stock when it is overvalued just to cover up options dilution. Rather they are buying it because it is undervalued and they have a pretty good idea that their average cost per share will be below market prices several months later.

Another Blowout Quarter at Sears

Long time readers of this blog know that I’ve been bullish on Sears Holdings (SHLD) for a long time. I’ve repeatedly made the case that bears focusing on same store sales were missing the point. Chairman Eddie Lampert’s strategy with prior retail endeavors, as well as with Sears Holdings, has been to not focus on overall sales, but rather on profitable sales.

Sears’ financial results have shown that this strategy is coming to fruition, but the bears have been winning with SHLD as of late. In fact, the stock has been amazingly range bound for months, hovering between $115 and $125 per share, as the chart below shows. Despite the pattern of higher than expected profits, the stock has been stuck. It manages to open higher after posting quarterly results, only to see the gains vanish by the end of the day.

This morning Sears reported fourth quarter earnings of $4.03 per share, 41 cents ahead of estimates, which stood at $3.62. Again we see the stock rallying in pre-market trading, rising $9 right now to $126 per share. If the recent past repeats itself, the stock won’t hold those gains and will continue to trend in its narrow trading range. This result would not be surprising if we continue to hear about falling sales.

However, I am still holding out hope that today’s gains hold and we get a breakout above $125. It’s amazing to me that the company is purposely trying to reduce sales by only selling products that they can earn a profit on, and yet when they deliver such results, people complain of market share losses.

Investors need to realize that over the long term earnings drive stock prices. If sales were all that mattered, not profits, then the Internet bubble never would have burst. Consider how many dollar bills I could sell if I only charged 95 cents for them? My sales would great, sure, but my stock would be worthless without profits.

A.G. Kicks Abercrombie While It’s Down

Despite today’s downgrade from “buy” to “hold” by A.G. Edwards (point “B”), I still view the recent weakness in shares of Abercrombie and Fitch (ANF) as an excellent entry point for investors. As you can see from the chart below, A.G. has hardly been adept at calling the direction of ANF stock. They put the “buy” recommendation on it in June 2005 (point “A”) and within weeks the shares began a freefall from over $70 to under $45 in less than two months. If I’m right that Abercrombie will rebound later this year, this will be just another example of analysts urging clients to buy high and sell low.

Urban Jumps 12% on Analyst Comments

Two weeks ago I wrote that Urban Outfitters (URBN) looked like it was bottoming at $25 and change, given that it was oversold and yet was holding a heavy support level around $24.44-$24.45 per share. The next week, on January 4th, the stock closed at $24.48 and never went any lower.

Today we have a couple of positive analyst reports pushing the stock up more than $3, or 12 percent, to $28 and change. Traders can take their $3 and run, but I would not be surprised if we see $30 this month.

Another Entry Point for URBN

At the beginning of the year I highlighted shares of Urban Outfitters (URBN) as an attractive growth play for investors. Followers of that advice saw the stock rise from the low 20’s to the low 30’s over the course of 2005. However, recent weakness in retail stocks has caused a pullback in URBN and for those who have yet to take a position in the company, there is an opportunity here, I believe.

Not only are the fundamentals strong, but the technicals look good as well. Readers of this blog know I don’t use charts to pick stocks, but when a company I like fundamentally also has a good chart pattern, it’s usually a good entry point.

Here’s a second version of the chart, in response to the reader’s comment:

Sears Canada to Pay $1.7B Dividend

Shares of Sears Holdings (SHLD) are getting a boost in late day trading today after Sears Canada announced it would distribute the majority of proceeds from the sale of its credit card division to shareholders in the form of special dividends. Sears Holdings owns 54% of the Canadian division, and stands to net more than $900 million in cash from the payout. This is another windfall for Eddie Lampert to allocate profitably for shareholders that Wall Street isn’t really focusing on.

American Eagle Goes On Sale

Shares of young adult apparel chain American Eagle Outfitters (AEOS) are down $2 in after hours trading to $20.75 per share. The company reduced its fourth quarter earnings guidance tonight from 74 cents to 71 cents. That would put 2005 earnings at $1.90 for the year. A three-cent trimming of estimates does not warrant a nearly 10% dicing of the stock, mostly due to its already meager valuation.

If AEOS can hit $1.90 for the year ending in January, the shares will be trading at only 11 times trailing EPS in February should the current $20.75 price hold. For a company with a pristine balance sheet that can grow earnings 8%-10% annually for the next three to five years, that’s insanely cheap.

Peridot Not Alone In Buying Sears

Late Friday Sears Holdings (SHLD) announced that its board has authorized a $500 million stock buyback program. You may recall the company did the same thing exactly a month ago on September 14th. In today’s press release, Sears said they have bought back $434 million of that inital amount in the last month, at an average price of $118.86 per share.

This announcement brings the total amount of the buyback to $1 billion, or roughly 5% of the company’s outstanding shares, and could be completed within 60 days, start to finish. Based on these numbers, earnings per share for Sears in 2006 will be increased by nearly $0.40 per share.

Amazingly, the stock still goes down pretty much every day, and trades below the prices Sears has been paying recently. Investors won’t be able to come back a year or two from now and say they didn’t have a great chance to get in, that’s for sure.

Fossil: Back from the Dead?

There are certain companies that seem to have a huge profit miss and a resulting stock price catastrophe every so often. Fossil (FOSL) is a perfect example. This company is used to seeing its equity get crushed every few quarters. Investors who are willing to pounce can get a terrific price and wait for a rebound to sell for a nice profit.

Fossil, a leading maker of watches, once again has seen its stock drop from a 52-week high of $32 all the way down to below $20 per share, for a haircut of about 40 percent. Estimates for 2006 earnings are nearing $1.50 and the company has almost $2 per share in net cash on its balance sheet. The result is an enterprise value-to-earnings ratio of only 12x for a company that is growing double digits.

This most likely isn’t a stock that investors should buy today and hold for 3 to 5 years, given its history of putting together a few good quarters and then giving back the gains. Nonetheless, buying at these levels should give investors some upside as the company delivers on reduced expectations. When should FOSL be sold? I think a rebound of 25 percent is in the cards, so Fossil could see at least $25 per share in the next 6 to 9 months.

The Math Behind a Bullish Call on Sears

With the stock of Sears Holdings (SHLD) down 25 percent from its high, concerns are mounting, good news goes unnoticed, and sentiment has waned. Why then am I still bullish? Why is this the third time I’ve mentioned SHLD this month? Don’t worry, in the days and weeks ahead I will try to move on from talk of Google, Sears, and the airlines and explore some new companies.

Let me throw some numbers out there that show why I feel SHLD shares at $120 are a steal. After this, I’ll try and stop talking about it so much. Current estimates for 2006 call for Sears to earn $7.88 per share on $56 billion in sales. This equates to a 2.3% net profit margin. I happen to think this margin projection is too low. The way I see it, the best two comparables for Sears are J.C. Penney (JCP) and Federated (FD). After all, the Sears model is moving toward Sears and the newly created Sears Essentials stores, which very much will be traditional department stores.

Now, let’s look at consensus estimates for JCP and FD. For next year, JCP is expected to earn $4 on $19.5 billion in sales, with FD slated to make more than $5 per share on $16.6 billion. Both of these estimates come out to a 5 percent net margin. Call me optimistic, but I think the turnaround at Sears should net margins very close to JCP and FD. There is no reason to think a solid management team cannot attain department-store-like margins.

It is possible that Kmart was so screwed up that it is beyond repair, at least to get to the same level of profitability as these other stores. For sake of being conservative, I’m going to assume SHLD can get to a 3% profit margin by the end of 2006. Since the Sears model is going to be to sacrifice sales in order to boost profits, I’m going to combine my 3% margin estimate with $55 billion in annual sales, one billion dollars less than analysts currently expect. All of the sudden, SHLD is earning $1.65 billion per year, which makes for an easy calculation with 165 million shares outstanding; that’s $10 per share in earnings.

At $120 per share, the stock is only 12 times these profit estimates. And remember, this model does not include the $900 million cash Sears will get from Sears Canada, the $500 stock buyback program recently announced, or any real estate sales of any kind. There is a lot of upside here, and while it is by no means assured, given the recent negative sentiment and a 25 percent drop in the share price, SHLD looks very attractive. Just imagine if SHLD can ever get to a 5 percent margin, that would get us to nearly $17 per share in EPS. Put a market P/E on that and you get a stock price of $250.