Is Now the Time to Sell Sears (SHLD) Stock?
Tuesday, March 28th, 2017
We have discussed many companies in the past that have fallen and presented a great value opportunity. We believe that in retail there are now some great companies which have seen their stock prices fall dramatically and create great investment opportunities that will pay off 3,4, maybe 5 years down the road.
The question is, could Sears Holdings Corporation (SHLD) present that value opportunity?
Sears is in the services sector and the department stores industry. The company operates under the Sears and Kmart brands.
The current price for SHLD is $10.55 and the 52-week range is $5.50 - $19.12. Looking back to 2015, this company was trading above $40/share. Looking back even further to the company’s prime in 2006, the stock was trading above $160/share. We typically become interested in companies when they have fallen off their highs, but it is important to look at the fundamentals of the company before deciding to buy the stock.
Starting our analysis with the valuation ratios, we can see the company is in serious trouble. There are no earnings, book value, or cash flow for this company so these valuation ratios are not material. The company does have sales and the valuation ratio looks very strong at 0.05 as it is well below the industry average of 1.74. This is still concerning, companies can have all the sales in the world, but if it is not flowing through to earnings and cash flow then it does not benefit the company.
With no cash flow the company cannot pay out a dividend.
Sales have fallen by 12.0% over the last 12 months, while the industry average has seen an increase of 11.3% during the same time frame. The company could see further problems with total sales, as it has been closing stores in an effort to save on future expenses and generate cash. EPS looks even more troubling as they have fallen by 94.3% over the last 12 months, while the industry average has declined by 22.9% during the same time frame.
Sears has been struggling for many years and has not produced a profit or generated cash from operations since 2011. In the most recent fiscal year, the company saw a net loss of $607 million and its operations burned through nearly $1.4 billion.
As the company has burned through cash it has been forced to acquire debt and sell off important assets just to stay afloat. The company’s total debt bill now stands at nearly $4.2 billion and the company’s recent sale of Craftsman tools demonstrates how desperate it is for cash. With high debt levels and the company’s decision to sell off assets, the company has depleted its book value and total equity now stands at a negative $3.8 billion.
Sears current liquidity is also in question as it has a current ratio of 1.07 and a quick ratio of just 0.22. While the current ratio looks alright, the quick ratio is a stronger measure of liquidity as it excludes inventory from the current assets in the calculation. If the company runs into difficulty in liquidating its inventory it could have problems paying of its current liabilities.
Looking forward to January 2019, the company is estimated to lose $10.39 per share. With no estimated EPS moving forward, we would recommend a sell on this stock.
In the short-term, Sears stock price could continue to fluctuate largely as traders make bets on the company’s longevity. Minor news stories about the company could produce double digit movements due to speculative bets. However, over the longer-term Sears Holdings future looks bleak. Negative cash flow, income, and book value is not a recipe for long term success. The company’s stock price may continue to fluctuate up and down in the short term, but over the long term this company is a frightening one to own as bankruptcy looks inevitable.
Do you have a question or a company you'd like us to take a look at? Email us at Brent@WilseyAssetManagement.com or Chase@WilseyAssetManagement.com.