- Morgan Stanley is cautious on Sears Holdings (NASDAQ:SHLD) reiterating their Underweight rating noting margins have now fallen for three quarters, and that is despite drops in both depreciation and ad spending. Sum-of-parts support near $90 a share remains theoretical and stretched, in their view, and less likely to find a bid in a more constrained credit and retail environment. Valuation has downside to $75 vs peer group on FCF yield, even lower on P/E.
Buybacks continued in 4Q, but with cash down to $1.66bn (roughly half in Canada), ESL's meetings with investors will be important. Original ESL fund investors are still up at least 4x from the original Kmart bond before bankruptcy investment. Some investors may want liquidity. Firm believes any signs of redemptions or sell-down of ESL stake in SHLD would be a significant negative to the share price
At $95, they believe the market is failing to account for not only risks but likely outcomes. The 90bps drop in SHLD margins equals the average we assume for WMT, TGT, HD, LOW, M, JCP, JWN, and KSS.
Notablecalls: Don't shoot the messenger but I think SHLD may have some downside in it. There were some Icahn stake rumors yesterday (10% chance of being true, imo), so there could be some weak hands around.
Not a huge convicion call by any means. Just letting you know it's out there.