Dillard’s (DDS) could quickly double on “upside perfect storm”

• The “upside perfect storm”. Dillard’s is now hitting another upside “perfect storm” like the one that last saw it spike up to the $90’s. But this time I expect that the share price could double (or more). The share count is now much lower (higher intrinsic per share) and the float is now much tighter. In addition, David Einhorn already sold out at $75, such there is no longer the overhang of shares which had previously restrained the upward price spike.

• Short interest in Dillard’s just jumped to 77% as shown by S3 data on Bloomberg. But the usual bi-weekly short data from the NYSE doesn’t get released until tomorrow (Tuesday) after the close. So, until tomorrow, few people are yet aware of this 77% short interest.

• Dillard’s has continued its hyper-aggressive share buyback, even at prices in the $80s. When the share price drops into the $50s and $60, Dillard’s has typically accelerated the buyback very sharply. Yet the disclosure of reductions in share count comes out only at infrequent intervals, often many weeks later, catching market participants by surprise and sending the share price soaring.

• Despite lackluster earnings, Dillard’s generates tremendous cash flow to finance the buyback. Dillard’s is continuously profitable and has very stable revenues. More importantly, Dillard’s generates so much cash that it has been paying down its small amount of debt even as it aggressively buys back shares. Moody’s re-iterated Dillard’s as investment grade just last week. Dillard’s currently has the authorization and the cash flow to repurchase more than 6 million shares (with only 10 million shares remaining in the entire float)

• Important. Here is why Dillard’s is aggressively buying back shares. Dillard’s real estate holdings are still recorded on its balance sheet based off of book value using decades old purchase prices. Yet in third party valuations, even the most ultra-conservative assumptions show a market value which is well in excess of $4 billion. Due to the shrinking share count, this now equates to over $180 per share (yes, even using the most ultra-conservative assumptions)

• Important. Here is why investors are missing this. Dillard’s does not hold quarterly earnings calls, does not present at conferences and does not provide sales or earnings guidance. In the absence of any pesky optimism, Dillard’s gets to quietly continue its aggressive share buyback.

• This report is the opinion of the author. The author is long Dillard’s (DDS). Click here for additional disclaimers and disclosures.