Who needs Google when you can invest in Kmart? In one of the most remarkable resurrections since Chrysler's near-death experience in the early 1980s, the retailer's shares have quintupled in the 14 months following its emergence from bankruptcy. What makes the surge especially remarkable is that it has little to do with Kmart's winning back customers from Wal-Mart or Target. Kmart is still a shrinking chain with sagging store sales and a thin selection of merchandise. New bosses have closed hundreds of stores and laid off tens of thousands of employees.
The stock's ascent can best be explained in two words: real estate. Sales of land, stores and leases have helped Kmart (symbol KMRT) amass more than $2 billion in cash. In June, for example, Kmart sold 54 stores to Sears for $621 million, dwarfing the $93 million that Kmart earned in the quarter that ended last April. More sales could be in the offing. Kmart still owns 1,500 stores, many in desirable sections of Chicago and Los Angeles. Kmart has been using its cash to buy back stock, and some analysts speculate that it might seek to acquire some fast-growing retail chains.
Is it too late to get in on the action? Probably. Sure, the stock may pop every time Kmart announces a real estate deal. But at $78, Kmart sells for 23 times UBS's estimated earnings of $3.35 per share for the year that ends January 31 -- hardly a bargain price for a company that has been in bankruptcy so recently. UBS, the only firm that publishes research on Kmart, rates the stock a buy (its second-highest rating), with a price target of $85. But among the risks of investing in Kmart, UBS notes that "management does not invest for the future, causing the deterioration of the company" that competition from Wal-Mart may force Kmart to close stores sooner than expected; and that lack of capital spending "may force customers to stop" shopping at Kmart. Enough said.
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