Friday, January 19, 2007

Sears Holdings (SHLD), Time To Enter The Insurance Biz?

Yesterday I opined about a few retail aquisitions Mr. Lampert could consider and what he should avoid. Let go a completely different route today.

Much has been said about SHLD becoming another Berkshire Hathaway. In Berkshire's early years, Buffett made several very diverse aquisitions. For SHLD to follow in this path, might it be time to jump outside of the retail space? Perhaps follow into Warren's footsteps and enter the insurance business? This does have the immediate benefit of officially qualifying SHLD as a holding company and not just a pure retailer. This will change how it is veiwed and shift the focus from the current miopic hysteria over its same store sales and onto its profits and investable cash (like Berkshire) were it should be. So, if we decide to go into the insurance biz, where to look?

I enected a couple of parameters here for looking at companies. I am looking for:
  • Can it be bought with cash? I do not want to use debt to purchase something
  • Does it have relatively high insider ownership
  • Billions in investments
  • Must have low debt
  • Trade reletively cheap to insurance peers

I came up with a few:

  1. Zenith National Insurance (ZNT) Does business pricipally in California insuring the workers compensation market. Insiders own approx. 13% of the business. Earnings growth has been very strong ($67 million in 2003, $112 million in 2004, $157 million 2005, and $174 million through the first 3 quarters of 2006). Total debt now stands at $59 million, a pittance. Here is the kicker, it has an investment portfolio Eddy would now control of $2.7 billion and a market cap of only $1.7 billion. Currently it trades at a pe of only 7 times ttm earnings and 7 times next years, well below its peers. Return on equity stands a 31%.
  2. Aspen Insurance Holdings (AHL) Headquatered in Bermuda, Aspen is another attractive candidate. Insider own 9% of the business. The investment portfolio here is the story, it currently stands at $4.4 billion vs. a market cap of only $2.4 billion. It trades at only 8 times ttm earnings and only 6 times next years projected. Total debt is higher than Zenith at $250 million but low for the industry and it recently began to accelerate its stock buy back program.
  3. Mercury General Corp (MCY) Insiders own 34% of this one. The investment portfolio here is another story. It stands at roughy $4.2 billion dollars and management has earned about 4% on it for the past several years. Can you imagine what Eddy could do to this ones earnings with his ability to invest? It has a market cap of $2.8 billion. Currently trades at 13 times ttm earnings and about 11 times next years projected, still a bit below inudstry average. Total debt stands at about $145 million.

All three would make excellent additions. They can be had for below market prices and come with billions in investments for Eddy to play with. Even better, they can be had without SHLD taking on any additional debt or shareholder dilution.

An aquisition of another retailer would have SHLD valued on the potential merits of its retail operations. Should Lampert instead gobble up an insurer, I beleive SHLD's valuation would explode to the upside as Berkshire Hathaway comparisons would have more merit and people who missed the Berkshire boat many years ago would not make the same mistake twice. This would cause a rush to buy a stock with a small public float creating massive upward pressure. Add to this the large short position in SHLD and you could have a move to the upside that could bust many of the shorts.

Either way, this will be very interesting.....


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