Description

Sears Canada (SCC CN) has been written up on VIC in the past and I suggest you read the prior writeup to learn about the company.  At the current market cap the company trades at a 9.5% free cash flow yield and 6.4x EBITDA multiple.   70.2% of SCC is held by SHLD which is controlled by ESL Partners.  I believe ESL Partners has the ability and intention to extract higher value from Sears Canada through cost cutting and asset rationalization for the benefit of all shareholders.  If cost cuts are attained, it's likely Sears Canada trades over $40 per share. 

LTM EBITDA:  $470 million
LTM capex:  $63 million  

Free cash flow is around $270 million based on 470MM LTM EBITDA - 63MM LTM Capex - 35MM in estimated interest expense - 100MM in taxes (assuming 37% taxes on 270MM of pretax income and 165MM in depreciation).   

Upside potential:
1) Future cost cutting opportunities.    In a 2005 bank financing presentation the company disclosed $301 million of potential cost savings.   If these savings are generated, EBITDA would increase from the $400MM range to $700MM or so.  If this happens and the company has a 7x EBITDA multiple,  the stock is over $40.  Little has been disclosed about the progress and source of these cost savings.  As of 9/30/06, EBITDA increased from 423 in 2005 to 470 LTM, so I think there is still significant upside. 
2) Sale of non-core assets including SLH trucking, below market leases, excess real estate. There is adequate disclosure about the real estate joint ventures which are worth 160-190 million according to Genuity, an independent third party.   However, getting information about the value of SLH and the leases is not possible through public disclosure.
3) Sale leasebacks - Genuity estimated about $500 million of value could be extracted through sale leasebacks of corporate owned and occupied property.  The company has not indicated whether or not they would pursue sale leaseback, but in a world where realty assets trade for 5-6% cap rates this is a valuable hidden asset.

Risks/concerns:
1) The company does not make much of an effort vis a vis investor relations making it impossible to get answers to key questions.  This is not necessarily a great problem as it levels the playing field.
2) Canadian research firms continue to value this based on P/E estimates which make the company appear fairly valued.   LTM operating earnings are around $1.30, up from $1.04 in 2005.
3) SHLD recently failed in its year-long attempt to squeeze out minority shareholders at $18, below Genuity's appraisal range of $19 to $22.25 and below other shareholders' estimates of fair value.   SHLD has effective control of Sears Canada and may attempt to theive wealth away from Sears Canada's minority shareholders through other  unfair mechanisms.  

Catalyst