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|Subject: The value of Kmart||Date: 6/8/2004 4:04 PM|
|Author: kitkatklub||Number: 30979 of 46839|
Kmart filed Chapter 11 in January 2002 and emerged in May 2003. It was a retail chain that could not compete against Walmart and Target and lost ground steadily. Since May 2003, the stock price has quadrupled and we have James Cramer calling Kmart the next Berkshire Hathaway. Where is all the value coming from?
Jim Cramer :
You are going to laugh at what I am about to say. You might even laugh out loud and think that I have lost my mind. But by the time you finish reading this, you will stop laughing, and you will buy a stock that you thought of only as a laughingstock, so to speak. You will thank me when you see me and marvel that some story in New York Magazine got you in on the ground floor—as you always hoped could happen—of the next Berkshire Hathaway.
But let's get the laughter out of the way first, because I am not about to bury the punch line: This is a story about how I want you to buy Kmart—yes, the worst retailer extant in America. I don't ask that you shop there first, although a little spadework of that sort might open your eyes to the possibilities. I don't ask that you suspend all judgment: Yes, Wal-Mart's a predatory competitor and Target's a lot more fun to shop at than Kmart, and might always be. All I ask is that you consider that Kmart, the reconstituted stock of the once-bankrupt retailer, the third largest discounter in America, might be something bigger than a retailer.
It seems that Edward Lampert the manager of a multi-hundred million dollar hedge fund bought Kmart bonds when Kmart declared bankruptcy. He took control and engineered the turnaround. He cut a lot of the management and employees and brought in the same team that had created the Gap look with trendy competitive priced clothing. They were to give Kmart a more youthful aura. He was also responsible for selling off properties for big gains. Kmart has stores in good locations all over the US. These are worth a lot of money and are most likely the biggest asset. Kmart owns The result is that Kmart has $2.2 billion in cash. Does that mean they are a successful chain or is someone cashing in on all that property carried on the books as undervalued assets and now it is worth a small fortune?
At a time when Kmart's rivals are growing and opening new stores, Kmart is shrinking. Sales at stores open one year(same store sales--an important metric in retail) dropped 13% during the first fiscal quarter. Kmart closed 600 stores between January 2002 and May 2003. It doesn't seem that Kmart's remarkable resurgence is due to any brilliant reorganization or vision or even better sales of Martha Stewart's stuff--its pure asset appreciation due to property that can now be liquidated at a profit .The gains offset nicely by net operating losses. The price is now over $60 a share quadruple the price at emergence from bankruptcy. If anyone had suspected that the real estate was going to be so valuable, then $15 per share would have been a heck of an investment. Lampert knew. He cashed in. We have stock price that is not the result of a well-run retail business, but is the reult of good real estate deals. When the company runs out of real estate--watch out.
Back to Cramer:
The result? Eddie's Kmart is making money, big money, even in quarters when it almost always lost a fortune, like the first quarter that just got announced (net income: $93 million). Maybe it was ex-hedge-fund-manager jealousy, but I didn't believe in Eddie's Kmart turnaround at first. I said on my television show, Kudlow & Cramer that the turn wasn't sustainable, that Eddie would cut and run like a good hedge-fund manager now that he'd managed to get some liquidity in the form of a common stock he could dump.
But then Eddie took to hounding me for not doing enough homework, and once I looked deeper, I saw what I see now.
I know what you're thinking. Hasn't Kmart already moved too much (it's up more than 250 percent, from about $15 to about $51, in the past year)? Isn't this Cramer just helping an old pal or, worse, talking his book? To which I say two things: (1) I have so many trading restrictions, courtesy of the jihad against guys who put their money where their mouth is, that I will have to own Kmart for years, and (2) I intend to buy enough Kmart going forward that my current stake will seem like a pittance. Still skeptical? Keep in mind that Kmart holdings has practically no debt and $22 in cash per share plus real estate conservatively valued north of $30 a share by independent retail analyst Gary Balter from UBS, another ex-Goldman alumnus who sees what I see.
Warren Buffett took a dowdy textile company and used the cash flow from it to buy other businesses outright and shares in publicly traded companies he thought were undervalued. He ended up with a wildly successful portfolio of stakes in both public and private companies. Given Kmart's huge net operating losses and the gigantic gains that can be had by selling and leasing Kmart's real estate, Lampert has stumbled onto his own Berkshire Hathaway holding company that he can use to house a similar portfolio, and I believe that's exactly what he's going to do. You are not buying shares in a third-rate discounter. You are buying the future holding company of a future Warren Buffett. Still laughing?
At present, Home Depot has said it will spend as much as $365 million to buy for 24 stores from Kmart. Big box retailers are finding it increasingly difficult to find prime real estate in good locations at square footage that fills their needs. To repeat: Kmart is sitting on a gold mine.
In a recent news release, Kmart CEO Julian Day deflected criticism that the company is really only interested in mining this asset and is not interested in the retail business at all.
"We're taking action on many different fronts simultaneously, all with the goal of making Kmart a great retail company once again."
At the same time , Mr. Day said Kmart will looking for opportunities to sell existing stores or to acquire new stores or businesses. I do believe the sell side of the story.
There was a discussion here not to long ago about whether these undervalued assets were really worth anything when deciding what price to pay per share for an equity. I think this is the best real lif example of just how much that affects stock price. Here is an essentially worthless retailer sitting on prime real estate with a stock price that has quadrupled since emenrging from bankruptcy.
I am going to disagree with the excitable Mr. Cramer and stop short of calling this Berkshire Hathaway.
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