JC Penney (JCP - commentary - Cramer's Take), a turnaround idea that I first shared with RealMoney readers at $10 per share in December 2000 that now trades at about $37, provided CEO Allen Questrom with all sorts of financial options. A careful review of the balance sheet and related disclosures at the time would have revealed a number of value-unlocking levers available to Questrom and his team -- e.g., valuable businesses such as Eckerd (later sold for $4.5 billion) and Direct Marketing Services (later sold for $1.6 billion). Penney recently announced a stock buyback of roughly 23% of the outstanding shares. This sort of value enhancing strategy is only possible because of a strong balance sheet.
Sears (S - commentary - Cramer's Take) is in a turnaround situation not unlike JC Penney a couple of years ago. While a number of turnaround strategies have already been implemented at Sears there remain two huge levers left to unlock:
Real estate holdings may approach $20-25 per share in value. Management should consider alternative strategies to unlock this value on behalf of shareholders.
Rejuvenate the sales base. Sears can take a copy from the JC Penney planbook on this score --- despite the naysayers, Penney has proven that an old retailer can rejuvenate its sales base. The consumer will come back with the right goods at the right price point.
The earnings leverage at Sears packs a wallop. The company is expected to earn roughly $3 per share next year, but if profit margins at Sears approximated their peer group, the earnings would be more like $7 per share. That's an eye-opening profitability gulf.
Sears has to get its merchandising right, as JC Penney has, to generate profitability in line with its peers. With the stock trading at about $37 per share, operating performance on par with their peer group ($7 per share in earnings) would result in a doubling in the share price.
P.S. Will you be there when Cramer makes his next move?
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The Turnaround Artist Rational Planning Suits the Long Term 8/9/2004 11:16 AM EDT Investors with longer time frames will be rewarded for maintaining reason in weak markets.
At time of publication, neither Alsin nor ACM held a position in any securities mentioned in this column, although holdings can change at any time. Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback
and invites you to send it to arne.alsin@thestreet.com.
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