RadioShack (RSH): Short-Term High Expected Return
The problems with RadioShack are well known as evident by downgrades and a negative 72% 52-week return. While doing some research I stumbled upon this mock former CEO interview. Funny and I think we've all asked ourselves some of those mock "questions," but it does force one to think and realize for long-term investors the struggle is real. Serious bears will appreciate this tongue-in-cheek CEO interview.
Now back to reality and the financial facts.
RadioShack is a consumer electronics retailer founded in 1899 with 34,000 employees, 4,476 company-operated stores, 1,496 Target Mobile centers; 227 company-operated stores under the RadioShack brand; 9 dealers; 1 distribution center in Mexico; a network of 1,091 RadioShack dealer outlets, including 33 located outside of North America; and 3 distribution centers in the U.S. The company also sells products through its website, radioshack.com
Value investors make a sound case for RadioShack being a potential value trap. Growth investors gave up on RSH over 10 years ago. Income investors are convinced the current 12.80% dividend yield will soon be eliminated. But for now RadioShack's current stable financial position will ensure auditors will not issue doubts as a going concern at least for the next 12 months. My thought on the potentially high expected short-term returns is driven many fundamental factors, further supported by the fact that 2.22 out of every 5 shares in the float are short with the real potential for a short squeeze, short-term mean reversion based on the current 52-week low, driven by a negative 72% return over the same period.
In the short term, profit taking by the shorts could help push the stock higher, especially from current levels and especially if less than negative news is published. The latest quarterly results will be reported this Wednesday, July 25, 2012. There are many scenarios to justify a much higher price in the short term. Even rumors of a potential takeover supported by an acquirer looking to capitalize on the massive 7,000 outlets nationwide additionally seem more realistic by the just under $600 million in cash, $477 million enterprise value with $4.37 billion in TTM flat sales.
I believe the short-term risk-reward ratio has become favorable. I purchased shares Thursday and Friday at $3.65 to $3.67 with a short-term view, unless further clarity justifies holding longer. I can't know if there will be an opportunity to sell RSH at a worthwhile exit price in the next one week or one year. Realistic possibilities of a quick $0.50 price move would provide an approximately 14% absolute non-annualized trade or longer term with improved margin stability, less likely than the move toward the more than $7 price occurring during February 2012. Even with a less-than-promising and uncertain future we know most stocks don't go down in a straight line after a negative 72% 52-week return coupled with a sound financial position.
RadioShack is profitable and cash flow positive. That would seem highly unlikely given all the recent downgrades with sell or hold recommendations. Yes, margins are dropping annually for some time but the company is selling for a dramatically lower price. The price at this time may have miscalculated/over calculated the stock's near-term risk. The market may quickly adjust the short-term valuation higher to compensate for this current less than certain valuation mistake. Radio Shack during the depths of the financial 2008 destruction traded at a price twice the current level. For some, the current closing price of $3.71 seems appealing on a risk-reward ratio. If we go back to January 2012 the price was $9.93 or $18.66 on January 2011. Valuation is historically cheap and at its lowest based on enterprise value to sales, book value, cash and EBITDA. Let's drill down on that using the market value divided by price per share.
Price to sales improved by approximately 84% from its 2010 P/S of .50 to the current P/S of .08. The P/B over that same period also improved by 80% from a 2010 P/B of 2.30 to current of .47. EBITDA to price was yielding in 2010 21.77% versus the current 44.40%. The P/CF 2010 was 14.60 to the current 1.80. But the price of the stock dropped 82% using the average month-end closing price during 2010 of 20.13 to the current 3.71.
Current financial statistics:
Market Cap: $368.87M
Enterprise Value: $473.40M
Enterprise Value/Revenue: 0.11
Enterprise Value/EBITDA: 2.23
Revenue (ttm): 4.37B
Quarterly Revenue Growth (yoy): -0.90%
Gross Profit (ttm): $1.81B
EBITDA (ttm): $212.50M
Total Cash Per Share (mrq): 5.70
Total Cash (mrq): $566.40M
Current Ratio (mrq): 3.22
Book Value Per Share (mrq): 7.44
Total Debt (mrq): 674.90M
Total Debt/Equity (mrq): 91.24
Shares Short (as of Jun 29, 2012): 42.58M
Shares Short (prior month): 38.00M
Short % of Float (as of Jun 29, 2012): 42.90%
Additional events may act as a short-term catalyst.
It's rare to see a large, profitable company selling below net current assets. This could attract new investors. Deep value guru investor Donald Smith made a large purchase in the first quarter of 2012. Currently it is reported he holds 2,950,129 shares. Joel Greenblatt made additional share purchases in the first quarter of 2012 with 283,505 currently reported in the portfolio.
There have also been management changes, including new leadership with the recent hire of Kohls' HR executive. CEO Jim Gooch was promoted in 2011 from his prior position as CFO. It is hoped that Mr. Gooch will use his finance background to allocate logically the company's assets and cash flow in a shareholder-friendly manner.
It may sound crazy but RSH as an acquisition candidate is not so crazy an idea. Having thousands of retail locations nationally and internationally could provide an important competitive advantage to an online giant. The combination may create an unstoppable advantage. Customers could check the products out at one of the 7,000 nationwide outlets, ask questions, speak to other customers, try alternative products and then purchase through their online store or return without the hassle and cost of repackaging and shipping costs.
RSH has also announced expansion in China with a partner, and deployed a new advertising campaign and agency to increase the value of the RadioShack brand with emphasis on the large and growing Hispanic population.