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RadioShack: Value or Value Trap?

May 10, 2011 | About:
David Chulak

David Chulak

29 followers
RadioShack is currently shown to be within portfolios of 4 famous investors, including Joel Greenblatt, George Soros, John Hussman and Robert Olstein. Ken Fisher sold out his position the later part of 2010. None of the gurus are currently shown to have increased the value of their portfolio by owning RadioShack; in fact, most have declined in value by approximately 20%.

RadioShack’s competition appears to be mostly made up of Best Buy (BBY), Conn’s (CONN), Target (TGT), Walmart (WMT) and Amazon (AMZN). The electronics industry appears to have taken a beating lately, with Best Buy near its 52-week low and Conn’s trying to make a comeback in the last six months with its stock beaten down to approximately $6 per share. Even Target’s shares have dwindled close to its 52 week low. RadioShack, also beaten down, is currently offering shares at just under $16, very close to its 52-week low of $13.61. Noticeably, RadioShack is catching the eyes of many investors. More articles are popping up each day indicating that RadioShack is a true value. But is it?

The company is trying to downplay the disagreement with T-Mobile in what RadioShack has called a “breach of contract,” but this affects RadioShack’s wireless division which accounts for most of its margins. The wireless segment accounts for nearly 50% of their business. Profits appear to keep falling and the annual report reminded me of school, where excuses were prominent.

What is being touted as a major coup, RadioShack is currently placing kiosks within approximately 1450 Target stores, of which about one half are completed, and that segment of business has increased its revenue by 50% (year over year). The RadioShack name will not appear at any of these locations. With Target sales seen as already soft, it’s unclear just how much impact the kiosks will play, but I don’t see it as a turnaround or catalyst for the company.

Glancing at their financial sheets, several items become quickly noticeable.

Free cash flow is shown to be in steady decline:



2001


2002


2003


2004


2005


2006


2007


2008


2009


2010


654.00


423.40


464.30


125.60


418.20


234.90


335.20


189.90


165.20


74.90


Certainly some of this can be attributed by the steady repurchase of shares:




2001


2002


2003


2004


2005


2006


2007


2008


2009


2010


179.24


168.43


164.11


158.47


134.63


135.82


131.09


125.07


125.19


113.83


With that said, the company has appeared to flat line. Notice the lack of improvement in the following areas:

Gross Profit:



2001


2002


2003


2004


2005


2006


2007


2008


2009


2010


2296.80


2238.30


2315.70


2434.50


2375.40


2233.10


2025.80


1922.70


1962.50


2010.60


Net Income:




2001


2002


2003


2004


2005


2006


2007


2008


2009


2010


166.70


263.40


298.50


337.20


267.00


73.40


236.80


192.40


205.00


206.10


Whether you choose EBITDA or EPS, no growth has really occurred:



per share


2005


2006


2007


2008


2009


2010


eps


1.98


0.54


1.81


1.54


1.64


1.81


ebitda


3.52


2.43


3.72


3.28


3.62


3.97


Lastly, the RadioShack stores appear to be sorely in need of a makeover. The stores are uninviting and apparently, not often frequented. Not unlike other businesses, changes to the stores are necessary to remain fresh and exciting to the customers. This is especially true in the retail industry. I’ve thought that RadioShack might even contemplate a name change, the current name being old and stodgy. Perhaps they would sooner wait for a buyer, which appears more likely. While name changes have historically had little impact, they do, in fact, sometimes give the company a small nudge, something RadioShack could use. Federated was helped some by taking on the Macy’s name. Google was certainly given a nudge when it changed from BackRub. And who remembers Brad’s Drink (now known as Pepsi)?

Alas, we must make a choice between the stocks that are “fallen angels” versus those considered “falling angels.” I currently do not see great horizons for RadioShack and consider it a stock with no great future, unless management changes, becomes stronger and can find some new direction.

About the author:

David Chulak
David Chulak is a private investor that uses a value approach to investing in the styles of Graham & Dodd and Warren Buffet. Looks for that margin of safety in an effort to preserve capital and attempts to guard against short term market fluctuations by having clear rules laid down in advance for selling an equity. Likes to visit the company's where his investments are in order to understand the business better.

Rating: 3.8/5 (6 votes)

Comments

gurufocus
Gurufocus premium member - 3 years ago
RadioShack's profit margin has been in decline:



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