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How One Analyst Thinks Hudson’s Bay Co. Shares Could Double

With the possible exception of Tim Hortons, is there any company that’s as closely associated to Canada than Hudson’s Bay Co. (TSX: HBC)?

The company started way back in 1670, when two French fur traders got British backing to venture into the area surrounding Hudson’s Bay to harvest the plentiful bounty of furs in the area. The two men also acquired ships and supplies and headed into the unforgiving Canadian wilderness.

After proving the area was indeed rich with furs, the king granted the two traders exclusive trading area consisting of all the rivers draining into Hudson’s Bay. The territory stretched more than 1.5 million square kilometers, even including parts of the present-day United States.

From there, the rest is history. By the late 1800s, the company started transitioning from fur trading into the traditional department store model, becoming the first company to build stores in some of Canada’s most remote communities. After a brief attempt to diversify into energy, the company bought Zellers in 1978, eventually selling the brand to Target, which took over the stores formerly occupied by the discount retailer.

Hudson’s Bay Company made news recently with its $2.9 billion acquisition of Saks Inc., which it closed earlier this year. So far, results have been somewhat tepid, but Canadian consumers are excited about the Saks brand finally making its way into Canada at some point in the future, likely in 2015.

Why are shares undervalued?

HBC is sitting on a lot of valuable real estate.

It’s bound to happen when a company has been in business longer than both Canada and the United States have been countries. Not only did it acquire a lot of valuable real estate in New York City and Los Angeles with Saks, but it also has a tremendous amount of land it’s acquired over the years in Canada. Notable locations include one in Gastown in downtown Vancouver, on 7th Avenue and 1st Street Southwest in downtown Calgary, and on Portage and Memorial in downtown Winnipeg.

It recently sold one of its prime locations on Queen Street in downtown Toronto to Cadillac Fairview for $650 million. And that’s just one property.

According to a report issued by M Partners, the company’s real estate alone is worth $2.75 billion, or right around $15 per share. It would unlock this value by doing what many other retailers have done — by spinning these real estate assets off into a separate real estate investment trust.

Just look at the success Loblaw Companies Limited (TSX: L) had when it spun off its real estate assets. The stock rose 14% in one day and is up 60% since the announcement. Income-hungry investors can choose to invest in the REIT, while investors who think the retail operations are improving can invest directly into the company’s main business. No longer is real estate a “hidden” asset.

HBC’s management has repeatedly said the company plans a REIT issue at some point in the future. Management said it when it sold the Toronto location, and reiterated it during the company’s annual meeting. Even CFO Paul Beesley was with Empire Company Limited (TSX: EMP.A) when it spun off much of its real estate into a REIT.

All things point to this happening in the future. The only problem is we don’t know when.

M Partners also believes HBC’s retail operations are worth $20 per share. The current share price is $17.75. Investors who get in now are essentially getting the real estate for free. Once the company unlocks the value of its real estate portfolio, a double isn’t outside the realm of possibility. This could be a great opportunity.

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