Hudson’s Bay Co: This Stock Could Double in 2015

Hudson’s Bay Co (TSX:HBC) is sitting on a lot of undervalued real estate. Here’s how it plans to unlock that value, which should send shares soaring.

The Motley Fool

For value investors, it’s a tough market.

With the exception of the energy sector, North American stock markets are in pretty good shape. Stocks are bumping up against all-time highs, and investors are generally pretty bullish. Certain macro issues are making some investors nervous, but the economy in North America looks to be pretty strong.

This kind of market is tough for value investors, who look to buy beaten-up companies. There just isn’t much distress out there. For the least disciplined, it means stretching the definition of a margin of safety, buying stocks that are just a little cheap. For the most disciplined value investors, it means sitting on cash and not doing a whole bunch.

Even in frothy markets, there are still value investing opportunities. Let me tell you a little more about Hudson’s Bay Co (TSX:HBC), which I think is an undervalued gem hiding in plain sight.

The skinny

Hudson’s Bay Company has come a long way since 1680, the year it was granted exclusive access to Canada’s great wilderness. The company essentially invented the current department store format in Canada, building huge locations in cities like Calgary, Vancouver, and Winnipeg. It eventually acquired locations in Ottawa, Toronto, and Montreal, as well as a bunch of real estate it eventually sold off to Target when it expanded into Canada in 2011.

The company has settled into a niche of being a high-end retailer. It acquired Lord and Taylor in 2006, eventually following that up with Saks Inc. in 2013. Between the three brands and its Home Outfitters banner in Canada, the company has 325 stores across North America. Plans are also in place to expand the Saks brand to Canada, where it’s relatively well known by consumers.

Although full results aren’t yet out for 2014, Hudson’s Bay is doing pretty well. The company is expected to do $8 billion in revenue for the full year, with an EBITDA of more than $600 million. That puts the company’s enterprise value to EBITDA ratio at just a little more than 11x, with is reasonable.

If the thesis on Hudson’s Bay just included the operating business, I’d agree it’s pretty weak. But there’s a huge hidden asset on the balance sheet, along with a plan to monetize that asset.

The real estate

Remember all that real estate Hudson’s Bay accumulated throughout the years? It’s likely worth more than the company itself.

To fully understand the real estate, we have to look at the record of Richard Baker, Hudson’s Bay’s ex-CEO (and current chairman). Under his leadership, the company has been quietly accumulating high quality pieces of real estate.

After buying the company for just $1.1 billion, Baker flipped the company’s Zellers locations to Target for $1.8 billion. He then sold the company’s flagship Toronto location for $650 million.

Baker then acquired many pieces of world-class real estate in the Saks acquisition. The Saks Building itself in New York City is worth $4.1 billion, which is $1.2 billion more than what HBC paid for the whole company just a year earlier.

Depending on who you ask, the remaining real estate is worth anywhere from $7 billion to $8 billion, which works out to more than $40 per share. Shares currently trade at $23 each.

The company plans to extract the value from the real estate by forming a REIT, a strategy already successfully implemented by other Canadian retailers. It even went as far as hiring the man responsible for the creation of Empire Company’s REIT to be its new CFO. Baker has repeatedly hinted at the possibility of this during interviews with the financial media.

The main risk of the story is management doing something silly with the cash, since the company is obviously raising capital for something. It took out a $1.25 billion mortgage against the Saks building in New York City, and just announced a private placement of nearly 5 million shares to the Ontario Teacher’s Pension Plan. It could easily raise $2-4 billion from a REIT spinoff. The risk is the company announces a big, debt-laden acquisition with the proceeds.

Still, in a market with few value ideas, Hudson’s Bay offers an interesting opportunity. If you add up the value of the business and the real estate, this stock could easily double once a catalyst appears to unlock value.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith owns shares of HUDSONS BAY COMPANY.

More on Investing

Oil pumps against sunset
Investing

Oil or Tech? Why Choose When You Can Get Both in a Single Stock?

Tech stock Pason Systems (TSX:PSI) is exposed to the energy market boom.

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Investing

Protect Against Inflation With 2 Top TSX Stocks

Here are two top TSX stocks that long-term investors concerned about inflation may want to consider in this time of…

Read more »

Woman has an idea
Tech Stocks

The Smartest Stocks to Buy With $20 Right Now and Hold Forever

These under-$20 stocks have the potential to grow further with time and deliver solid capital gains.

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

TFSA Investors: Put $45,000 in These Top TSX Stocks and Watch Your Passive Income Roll In

Are you looking to retire early? Here are a few ideas about how your TFSA could earn a passive-income stream…

Read more »

Human Hand Placing A Coin On Increasing Coin Stacks In Front Of House
Dividend Stocks

Love Passive Income? Here’s How to Make Plenty of it as a Real Estate Investor

You could definitely create passive income by investing in pure real estate, but you could make just as much, if…

Read more »

Make a choice, path to success, sign
Dividend Stocks

2 High-Yielding Dividend Stocks You Can Buy and Hold for Years

These two high-yielding dividend stocks can be the perfect addition to your portfolio, as the bear market causes payout yields…

Read more »

A worker uses a laptop inside a restaurant.
Tech Stocks

Why Investors Shouldn’t Give Up on Shopify Just Yet

Here's why long-term investors may not want to throw in the towel just yet on e-commerce juggernaut Shopify (TSX:SHOP).

Read more »

Retirees sip their morning coffee outside.
Dividend Stocks

TFSA Wealth: How to Turn $88,000 Into $1 Million for Retirement

Canadians can use the TFSA to hold a basket of diversified equity investments, allowing you to turn a $88,000 investment…

Read more »