I hate to pull a Burke CEO and comment ad infinitum on other investors' positions that I have no position in, but since I've had the unfortunate experience of being a long and short investor in this POS, I'm going to take a stab at how I would look at it.
This thing is in secular decline at worst, and barely treading water at best. Competition is outrageous, margins are declining, pricing power is non-existent, thus the current total debt to EBITDA ratio of 3.6 times is unsustainable. They are in a virtuous cycle of needing to reinvest back in the business but also pay down debt. So....
The way I would look at is in a pro forma scenario where they have to issue equity, then from there I would estimate normalized EPS.
Right now total debt is 6.9b and ebitda is 1.9b. I'd say a more sustainable td/ebitda ratio is say 1.5 times. to achieve that, they'd have to reduce debt by 4.05b. If they did that via an equity issuance at $5.50 per share, that's an additional 736 million shares added to current shares of 212 million. So then "new debt" is 2.85b - let's say the "new interest rate" is 6%, that means "new interest expense" is 171 million. LTM ebit is $1 billion, so "new EBT" is $829 million (1,000 - 171). Assuming a 35% tax rate, "normalized net income" is $539 million, or $.57 per share (948 million shares out).
So a "no growth" valuation would perhaps be 10 times $.57 per share, or $5.70 per share. I think someone said the real estate is another $2 billion, so that's another say $2.11 per share for an all-in fair value of $8.00 per share.
Free cash flow available right now for debt paydown is probably around $500 million, which means it would take 8 years for them to reduce the $4 billion of debt down to 1.5 times ebitda, and that assumes ebitda does not continue to decline, a highly unlikely proposition.
Obviously the above analysis can be manipulated ad nauseum, but at current levels I just don't see the margin of safety at these seemingly attractive PE multiples given there is next to zero balance sheet protection.
IMO, a stock wouldn't be this heavily shorted if there weren't serious fundamental issues. SHLD, NTRI, RSH, TLB, SVU have all eventually succumbed to the weight of their own deteriorating business models. SHLD is quite the exception given the activism at hand in the stock.
As with any "deep value" play, this very well could double from here for one reason or another. I just don't see how, from here, it passes the test of would you be comfortable owning it for five years if the stock market shut down. Between reinvestment just to maintain the business, margin erosion, and debt repayment, I don't see the return over the next five years were the market to shut down. Much better opportunities out there, IMO....
