Just how smart is Eddie Lampert? -- Hoover’s Business Insight Zone

Just how smart is Eddie Lampert?

August 30th, 2007

The bidding on that question starts at “Really, really smart” and goes up from there, but it will be interesting to see how the hedge-fund wizard will be regarded if his Sears Holdings keeps performing like it has been.

Sears Holdings profit falls 40 percent

Mind you, this is only one facet of the company’s performance, because Lampert doesn’t run the holding company of Sears and Kmart like most retailers run their operations. He’s still a financier at heart, and throughout the time he’s owned the retail chains, he’s used them as cash-generating machines that provide him with ample coin for further investment. Nat Worden of TheStreet.com offers a detailed analysis here:

Lampert’s Sears Strategy Could Pay Off

. . . At $140, the company is trading at approximately 10 times its annual cash flow after taxes. That means that by buying back shares, Lampert is essentially investing his money at a 10% cash return — a good deal considering that 10-year Treasury bonds are yielding less than 5%.

The cheaper the stock goes, the higher his return. Meanwhile, public shareholders who bought the stock at $150 are banking that the market won’t let Lampert get his 10% return for long. Eventually, the value of Sears Holdings’ cash generation will have to be recognized in its market price, as long as the cash flows hold up.

With its sales declines showing signs of digging into its bottom line, Sears Holdings could soon find its cash flows dwindling rapidly — especially in a consumer-led economic slowdown. In that worst-case scenario, some consumers may turn to discount retailers for their shopping needs, but as they build stores, retail titans like Wal-Mart, Target, and Costco are in a much better position to win that business.

The key issue: somewhere down the line, Sears Holdings still must succeed as an actual retailer. Right? Right? That’s the question its non-Lampert shareholders are asking; the answer to that question in, say, two more years will help us to answer the question of just how smart Eddie Lampert is.