Wednesday, June 13, 2007

Lampert and The Prince

We first profiled Eddie Lampert late in 2005. Since then, Sears Holdings (NYSE: SHLD) has returned approximately 35%. Our thesis on this company and Mr. Lampert has not changed. Meanwhile, others are jumping on the bandwagon. Most recently on June 1st, Morningstar (Nasdaq: MORN), which by the way is a holding in the Model Portfolio, raised its fair value estimate from $150 to $240. Not as exciting was an increase in price target from $195 to $200 by Goldman Sachs earlier today - we can thank strong cash flow generation and valuation updates for that generosity. We highly encourage you to read Mr. Lampert's Chairman Messages to get a sense of his approach to operating a business and to making investments. You are in good hands. Here is what he did with some of the cash Sears generaed in 2006:
  • $816 million used for share repurchases (we repurchased over 6 million shares in the year at an average price of about $133 per share);
  • $474 million used for capital expenditure reinvestments in our businesses;
  • $318 million contributed to fund our legacy pension obligations;
  • $282 million used to purchase an additional interest in Sears Canada. Our ownership level is now 70%, up from 54% last year; and
  • $250 million used for net debt reductions as our domestic debt balance declined to $3.0 billion (or $2.3 billion excluding capital lease obligations).
Mr. Lampert generated some other headlines worth mentioning. In May, SEC filings revealed that his hedge fund vehicle, ESL Investments, had amassed an $800 million stake in Chuck Prince's Citigroup (NYSE: C). It appears he built his stake through last September and bought more during the first three months of 2007. Overall, we estimate his average cost at close to $50. We have spoken positively about Citi in the past. My brother and I have been longtime shareholders. With Lampert on-board and a 4% yield, we are happy to continue to hold.

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