Real Estate An Undervalued Asset At Dillard’s?
After Research Recap last week cited Dillard’s Department Stores as one of the worst performing retail stocks, The Motley Fool saw a possible buying opportunity, based largely on the value of Dillard’s real estate holdings.
Based on Dillard’s $3.1 billion enterprise value (market cap plus net debt), TMF calculates that anyone buying Dillard’s shares would be paying $75 per square foot of owned real estate ($3.1 billion/41.5 million).
In last weekend’s Barron’s, an article similarly argued that Sears Holdings was cheap because the stock market valued Sears’ real estate at $33 per square foot (based on enterprise value/average square feet). The article pointed out that comparables such Home Depot, J.C. Penney, Kohl’s, and Target trade at $277, $144, $319, and $341 per square foot of real estate, respectively.
In addition, Dillard’s trades at an enterprise value of just 5.3 times trailing EBITDA, compared with J.C. Penney at 5.8, Nordstrom at 7.4, and Macy’s at 6.4.
TMF also notes that Barington Capital, “a very savvy hedge fund, has been agitating for change.” Barington’s track record includes helping other retail companies, including Pep Boys (also a real estate play), Syms, Warnaco, and Collective Brands, unlock value.
According to letters Barington wrote to Dillard’s management, it appears that the hedge fund has not succeeded so far in getting management to implement shareholder-friendly measures. However, TMF says “it’s always a nice thing to invest alongside funds such as Barington and Third Point (which also owns a stake) that actively work to unlock value.”
On the negative side, Credit Suisse on Oct 11 saw no relief in sight for Dillard’s, reiterating its “Underperform” rating and lowering its earnings forecast. Meanwhile Oppenheimer sees the downward spiral deepening, with Dillard’s stock price propped up only by continuing speculation that the Dillard family may sell the business or take other steps to assuage dissident shareholders.
We anticipate DDS shares would fall to the low teens, as happened during the 2000–2004 period, if speculative fever were to diminish.
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