Enterprising Investor Forum

We have already written numerous times about Lampert and the fact that we are still giving him the benefit of the doubt and that it is too early to judge if his bets will pay off. As some of you may have read in various headlines, in his latest shareholder letter, he compared himself to Eli Manning who lead the Giants to win the Super Bowl. We wanted to post his letter for you to read….we still stick behind Eddie:

“To Our Shareholders:

I would like to start off this letter in a rather unconventional way by congratulating the New York Giants, led by their young quarterback Eli Manning and by head coach Tom Coughlin, for winning the Super Bowl earlier this month. This was quite an upset victory. Throughout the regular season, fans and the media were quick to criticize Manning every time he had a bad game, and to question his leadership. As recently as late November, after a particularly disappointing loss to Minnesota in which Manning threw four interceptions, many pundits were declaring him a bust. Manning, however, did not give up or lose heart. He remained focused, continued to work hard on his game and on improving his skills, ultimately leading the Giants to the NFL Championship and being named the Super Bowl MVP.

I mention this not because I am a Giants fan (I am actually a lifelong fan of the New York Jets) but rather because the Giants’ story reminds me of what we went through a few years ago with Kmart. When I first became involved with Kmart in 2002, during its bankruptcy, the company had been given up for dead by most industry analysts and media commentators. Kmart was like an undrafted free agent who nobody thought had a chance to play in the big leagues. Its more than 150,000 employees and its investors had an uncertain future. Despite intense criticism of and skepticism about the company and its prospects, we were able to rally Kmart’s various constituents and turn an unprofitable, failing company into a profitable company with hope for the future. Like Eli Manning, we know what it’s like to be underestimated and questioned, but we intend to keep working on our game to achieve our full potential.

I would be the first to tell you that I never expected it to be easy, and it certainly hasn’t been. But it has been rewarding – rewarding to those investors in Kmart who stuck with the company after it emerged from bankruptcy, to the vendors who continued doing business with Kmart, to the associates who remained with Kmart, and to the customers and communities who continued to support the company.

In late 2004, Kmart was on its way to earning almost $1 billion in Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), had built up almost $4 billion in cash, and had virtually no debt. In November 2004, we believed that the company’s prospects could be enhanced by a partner who could help improve the productivity of Kmart’s almost 1,500 stores. Sears had been challenged for many years and found itself seeking a way to grow outside of the mall. Expanding by building a large number of stores was a risky strategy. By merging, the combined company would have the scale, time, and capabilities to compete more effectively against many of its more profitable rivals.

Again, at the announcement of the merger there were skeptics in the industry, in the media, and in the financial community. Many of the issues raised were valid. However, the sensationalist tone masked the real debate. How would Kmart compete against the more profitable and better capitalized Wal-Mart and Target? How would Sears compete with Home Depot and Lowe’s as well as Best Buy, Kohl’s and JC Penney? Why would we believe that we could do something that so many others had tried with mixed results?

All of these are legitimate questions. What we have tried to do is improve our operations in the near term while positioning ourselves for long-term success. After the merger, we initially worked to improve our operations by focusing on the basics, like markdown disciplines and expense management. At the same time, we have been prioritizing our resources to rebuild many of the company’s systems and processes by taking a longer-term view than most investors and business managers.

Looking forward, I continue to be excited about the prospects for Sears Holdings. In 2008, we need to reverse much of the profit erosion we experienced in 2007. It won’t be easy, especially if the economy stays soft. The environment surrounding U.S. retail has been very difficult; we were not alone in experiencing disappointing performance this past year. Many retail companies lost significant market value. As illustrated in the table below, while the recent correction has brought Sears Holdings’ stock price down from an increase of nearly 20 times since Kmart emerged from bankruptcy to around ten times, it remains one of the top-performing retail stocks over the past five years. In addition, it is not clear that heavy expenditures of capital guarantee either short or long term success. Like any investment of capital, the return on that capital over time will determine its wisdom.”

Link to SEC filing: here.

For investors looking for stability in this current economic climate and a ‘nice’ 4,1% dividend yield, Altria (MO) seems to be an excellent opportunity.

Altria is the leading manufacturer of cigarettes, and other tobacco products, dominating global markets with:

• 50% market share in the United States
• 60% in Latin America
• 40% in Western Europe, and
• 25% in Japan

Just to put things into perspective, Marlboro generates more sales volume than the next 10 biggest brands in the US and current projections for the growth of world-wide cigarette consumption are for between 1 and 3% annually for the next two decades or so.

Furthermore, having finalized the spin-off of Kraft (KFT), management is concentrating on Philip Morris International which many feel will prove to be a real catalyst for growth. We believe that it would be quite reasonable for investors to target a share price appreciation of between 15 and 20% in the next 24 months whilst enjoying the dividend yield.

Please read our disclaimer.

It seems that the market does not want to recognize the true value in ConocoPhillips (COP), despite its strong fundamentals, solid Financial & operational results and the fact that Buffett and Soros believe in their prospects.

Some observes have been critical of the Burlington deal and that fact that they are pursuing aggressive and potentially risky investments in Asia and the Middle East along with their non controlling stake in Lukoil. However, we feel that they are positioning themselves for greater rewards in the future. These are the kind of opportunities we like when the market seems to take a bearish view of these recent investments (i.e. potential political and economical turmoil in Russia) rather than focus on the incredible opportunity and the upside potential that their investments can deliver.

With fair value estimates from various analysts and publications ranging between 100 and 120 USD, their current price and the fact that they have just increased the dividend by almost 15%, we think that ConocoPhillips is an interesting value play.

Please read our disclaimer.

Despite Microsoft offering Yahoo! a 62% premium with their January 31st offer at 31 USD per share, it looks like Jerry Yang will not go without a fight. Yahoo! rejected the takeover bid on the grounds that it “substantially undervalues” the company and Microsoft has responded (even through Gates) by maintaining that the offer is fair, they will not start haggling and that they are willing to embarking on a proxy battle.

The following weeks will no doubt be interesting as this plays out and despite the outcome with Microsoft, we find it hard to believe that Yahoo! will stay independent. It seems that Mr. Yang is prepared to go to war but is this because he is really defending Yahoo! interests or his own ego? A full blown fight would be harmful to both companies and leave deep scars that would have to be healed during a difficult merger/integration process and this cannot be be good for anyone who will still be working with the new entity.

The main issue is that current Yahoo! management has failed to deliver value to their shareholders and by turning down this deal, they are simply compounding this. Furthermore, many powerful shareholders and board member hold stakes in both companies and would find it very difficult to explain no being able to realize this +60% gain on their Yahoo! stake.

Maybe Mr. Yang should try and discuss a more ‘reasonable’ settlement instead of sticking to his min. 40USD price…

Maybe Microsoft should just go ahead and sweeten the offer….

Whatever the outcome, we hope that the true winners will be the shareholders.

Stay tuned for more action…..