Day 266: Amazon Buys Sears?

Mother's Little Helper portfolio was UP today +834.63 (+0.10%).

Overall GAIN YTD: +$235,648.83 (+40.36%).

Our benchmark index, the S&P 500 is up +11.96% Year To Date.

http://money.cnn.com/data/markets/sandp/

This Weeks Calendar:

Tomorrow I'll be listening to the 4th quarter earnings call from Copart Inc. the salvage cars and insurance auction site. Copart has been a solid performer for the portfolio with more growth in store. The pre-release earnings came out just now.

• Earnings per share were $0.30 vs $0.29 expected

• Revenue was $378.6 million, up 13.8% vs analysts expectation of $357.2 million

• Shares are up 4.5% or about $34/share in after hours trading

The portfolio is up today, so I thought I'd talk about something completely unrelated to the portfolio. I think Amazon will buy Sears.

Why

The last mile, tons of great brands, manufacturing relationships, stores in almost every city and an established pharmacy business that ranks #1 in customer satisfaction.

The last mile delivery of products is the most expensive, this is the domain of UPS, USPS and Fedex. But I think Amazon has its eye on owning the last mile by having distribution centers all over the country. Using their fantastic customer analytics Amazon will know what needs to be stocked in any location and with their investments in delivery technology and autonomous vehicles I can easily imagine my order being delivered to my house or office by an autonomous vehicle.

Sears, or Sears, Roebuck & Company, is an American chain of department stores founded by Richard Warren Sears and Alvah Curtis Roebuck in 1886. Formerly based at the Sears Tower in Chicago and currently headquartered in Hoffman Estates, Illinois, it began as a mail ordering catalog company and began opening retail locations in 1925.

The company was bought by the American big box chain Kmart in 2005, which renamed itself Sears Holdings upon completion of the merger. In terms of domestic revenue, Sears was the largest retailer in the United States until October 1989, when Walmart surpassed the record. It is currently the fifth-largest American department store company by sales as of October 2013 (behind Walmart, Target, Best Buy, and The Home Depot), and the twelfth-largest retailer in the country overall.

Sears operates divisions in Canada too, as well as several other subsidiaries within its brand. Sears Holdings would come with a lot of great brands and properties, not all valuable but Amazon would get everything in the deal. Unfortunately Sears recently sold its Craftsman line of tools to Stanley Black & Decker and sold off some of its properties for $177 million. While Sears has been closing stores not all of them are being sold off; a closed store is still a store waiting to be reopened by Amazon. The most valuable brands to Amazon would have to be the Kmart Pharmacies and Allstate Insurance. In 1993, Allstate went public when Sears sold 19.8% of the company; at the time, it was the largest IPO to date.

• 597 retail locations nationwide

• A&E Factory Service

• Sears (Full-Line) is a chain of department stores that are usually located in shopping malls

• Sears Grand is a chain of hypermarkets typically located away from shopping malls

• Sears Home Services

• Sears Optical

• Sears PartsDirect is a chain of lawn & garden equipment and appliance parts stores

• Sears Portrait Studio

• Sears Vacations an online travel agency

• Allstate – Automobiles, motorcycles and mopeds, vehicle parts and insurance

• Alphaline Entertainment – Video-on-demand

• Celestial Star – Diamond jewelery

• Challenge Records

• Cheryl Tiegs – Clothing

• Coldspot – Appliances

• Companion – Tools

• Conqueror Records

• Covington – Clothing

• Dashmate Automobile Radios & Tape players

• David Bradley – Farm machinery

• DieHard – Batteries

• Dunlap – Tools

• Easy Living – Painting equipment

• Economy – Iceboxes, fountain pens, sewing machine cabinets, gasoline engines, portable saw rigs, variety of farm equipment, cream separators

• Evolv – A do-it-yourself line of tools marketed with eco-friendly green packaging

• Free Spirit – Bicycles

• Gold Bond – Footwear

• Goolagong – Clothing

• Harmony House – Interior decorating products

• Hearthside – Rug looms and quilting frames

• Hercules – Work clothing, appliances, insurance, sewage systems, letterman's jackets, fire extinguishers, heavy-duty coveralls, and home heating systems

• Hillary – Camping and outdoor gear

• Homart – Heating and cooling systems, plumbing supplies, electrical supplies, kitchen cabinets, building supplies

• J. C. Higgins – Sporting goods, camping

• Kenmore – Appliances

• Kromedge – Sawblades, dadoes, moldering heads, router bits

• Penske – Automotive testing tools

• Permanex – Blow-molded polyethylene tool storage cases, gas can

• Pilgrim – Clothing

• Roebucks – Clothing

• Sears Video Arcade – In-house version of Atari in the early 1980s; discontinued in favor of the actual Atari system

• Silvertone – Stereos, televisions, musical instruments

• Silvertone Records

• Supertone Records

• Ted Williams Brand – Sporting goods

• Toughskins – Clothing

• Tower – Cameras, photo supplies, office equipment

• Weatherbeater – Painting equipment

Blue Light Special

In addition to the exclusive brands, Sears Holdings owns a 10% stake in Sears Canada which includes about 175 locations. Altogether in the U.s and Canada, retail stores under the Sears, Kmart and other names total about 1,000; it's hard to keep track with all the closings.

Sears generates about 19.75 billion in revenues but isn't profitable and only has about $212 million in cash and is carrying $4.23 billion in debt. Sears needs a knight in shinning armor to save the company and Amazon is the perfect choice. Amazon paid $13.7 billion for Whole foods, a 27% premium. Sears current market capitalization is only $780 million, at $7.30/share at today's price, a 30% premium would snap up Sears for only $1 billion dollars. What's Amazon waiting for, it's a deal at $2 billion?

With Amazon's aggressive moves into brick and mortar retail it would make sense for the online retailer to acquire a chain that provides instant national presence. Sears stores are special and perfectly aligned with Amazon's growth path. Big open floor plan stores, with high ceilings, lots of loading docks and all located in prime areas. Buying Sears means buying Sears Holdings which includes a lot more than just Sears stores.

Number 1 reason to buy Sears

With all those great brands, and big stores and a bargain basement price, the number one reason for Amazon to buy Sears is for the K Mart Pharmacy franchise. Amazon can turn the drug industry upside down in very short order and bring lower cost drugs to consumers nationwide. The pharmacy business is probably worth as much to Amazon as the rest of Sears combined.

When

My guess is we might hear about Amazon buying Sears in late 2018 to mid 2019.

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Clay Baker

Disclosure: I am personally invested long in these stocks that appear in the MLH portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks that do not appear in the MLH portfolio: BA, BRK.B, CELG, CSCO, CTXS, CVX, DOW, DVAX, FB, IBM, NTES, NVDA, OMER, PFE, PG, RDHL, SCHW, THO, TWX, VEEV, VZ, XLNX, XOM

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.