The marriage of Sears and Kmart may have put Ed Lampert's retail empire in the same neighborhood as
. But analyst coverage of
suggests it might as well live in the boondocks.
The combined company now boasts a market cap of $23.1 billion, making it the third-largest discount retailer in the U.S. Meanwhile, according to Thomson First Call, only three analysts follow the stock. That compares to Wal-Mart, with a market cap totaling $206 billion and 33 analysts, and Target, worth $42 billion with 28 analysts.
Even the large number of analysts that followed the old Sears through its troubled times have abandoned coverage of the new.
With their historic bias toward buy recommendations, one might surmise that sell-side analysts took one look at Sears Holdings' soaring valuation and fled. Another factor is the company's refusal to spoon-feed the Street.
Sears' posture befits its taciturn chairman, whose strategy of unlocking value through unconventional means fits few Wall Street models. Lampert has held no quarterly conference calls, issues no earnings or sales guidance, and doesn't release a monthly comps update by which investors compare other big chain stores.
While the strategy is an analyst's nightmare, the results have been a shareholder's dream. After emerging from bankruptcy in 2003, the stock was one of last year's biggest performers, roughly quintupling in price.
Word circulated on Wall Street this week that Sears Holdings plans to stop using an active investor relations department, limiting its communication with Wall Street to regulatory filings required by the
Securities and Exchange Commission
Sears spokesman Chris Brathwaite refused to comment on the rumors except to say, "Our investor relations department has been scaled back, and we're endeavoring to make our Web site as self-sufficient as possible. But we haven't said anything definitively about what is going to happen at earnings time."
The company, whose first quarter just ended, has not set a date for its earnings release, but Brathwaite said it wouldn't be in the next few days. The average of two analysts surveyed by Thomson First Call is for Sears to earn 63 cents a share, but it has not issued any guidance.
"This is consistent with the cost-cutting culture of Eddie Lampert's Kmart," says Richard Hastings, an independent retail analyst. "People bickered constantly that they wanted to hear more from Kmart, but the shareholders never complained when they saw their returns on investment. Lampert goes through every facet of these businesses and asks, 'Do we really need this?' In this case, the answer is clearly 'No.'
"At the end of the day, the real purpose of all the machinery surrounding the equity analysts on Wall Street is to help companies raise money in the public market," Hastings adds. "In the case of a company that is going to issue more stock or sell debt, they want to make sure their relationships with the analyst community are very good. But that's no concern for a guy like Eddie Lampert."
To be sure, Lampert is riding high in a market in which hedge funds have captured the glamour once reserved for venture capitalists during the Internet bubble. Among hedge funds, his ESL Investments could be the most famous of all, and on his name alone, the market has attached a premium to Sears Holdings that otherwise would be unthinkable.
The prevailing bull case on the stock theorizes that Lampert will continue to build up the company's cash horde and eventually make investments that have nothing to do with retail. The company's recent announcement that it's considering selling its Orchard Supply Hardware chain could be a sign that the process is under way. Regardless, with nearly $8 billion in cash on the latest balance sheets from Sears and Kmart, it seems unlikely Lampert would be looking to raise money any time soon.
Lampert's way with Sears Holdings bears a similarity to that of Warren Buffett at
-- a company Lampert admires. While pundits and politicians have put a premium on transparency as a path to good corporate governance, the relative stealth of Lampert and Buffett can paradoxically result in more transparency, as shareholders contend with less noise.
Buffett does not provide guidance or any special communication with analysts outside of his regulatory filings. He communicates directly with shareholders at his annual meeting and his annual letters to shareholders, which give a clear assessment of Berkshire's business in layman's terms. Lampert could be planning to follow suit.
"Every public company in America ought to learn from this and operate that way," says Mohnish Pabrai, managing partner with Pabrai Investment Funds. "Businesses by definition are unpredictable. There are so many variables that anytime you start getting into giving earnings guidance, you run the risk of trying to please the short-term demands of analysts at the expense of the long-term success of the business."
Among other things, Pabrai says, a lack of volubility can keep managers from falling prey to gimmicks like "earnings smoothing" or other accounting tricks that are employed when ill-advised promises appear to be in danger.
"That has happened with great companies in the past, like
," Pabrai says. "It appears to be the root of the problem that has been going on at
Meanwhile, Sears Holdings' closest competitors, Wal-Mart and Target, are two of the most responsive companies to the sell side on Wall Street. They are constantly updating monthly sales guidance, meeting with groups of analysts and forecasting earnings; and their management teams are highly respected.
The contrast suggests to some observers that Lampert's dreams lie beyond managing some department stores.
"He's going to use the cash flow to buy assets that have nothing to do with retail, so he's actually just preparing the investment community for that eventuality," Pabrai says. "I think he's very smart to start preparing people."