As spreads on Sears Roebuck bonds continue to widen, a buy-side analyst argues that the paper is still too rich. Since Sears gets roughly 60% of its earnings before interest and taxes (EBIT) from credit card debt, the buy-sider argues that it is really a finance company in disguise. The analyst says Sears should trade closer to the 300 range, with Household Finance. While the Sears 6.7% notes of '12 were 201 basis points over 10-year Treasuries, that was well inside of Household's 7.3% notes of '12, which were at 361.
Sears probably should trade slightly wider due to its credit card business, says Dave Novosel, head of high-grade research at Banc One Capital Markets. However, he does not believe it is appropriate to compare the company with Household, because that company's bond spreads have seen so much volatility of late. Other finance companies trade closer to Sears anyway, he says.