Recently, an acquaintance of mine asked my opinion of Radio Shack (RSH, Financial) and what I thought of it as a potential investment opportunity for him. After the usual caveats as to “opinions,” I mentioned that I had written an article about the company approximately a year ago. I decided to look at the article and told my friend that I would get back to him.
The article was entitled, “RadioShack: Value or Value Trap?” and what immediately struck me upon reading it was that I had asked the question in the title, but was rather vague in my answer. What was clear was that I wasn’t enthralled with the company. Having read some additional material, I decided to take a second look to see if my opinion, vague as it was, had altered over the last year. After all, I had just come across an article stating that the cable personality we all know as Jim Cramer had visited a RadioShack and had a bad experience with their service, and therefore concluded that the stock would go nowhere. So, I wondered aloud, I must have been correct…. right? (Not really.) If I concluded that a stock was going nowhere because of poor customer service, I can give you a quick list of hundreds of companies that are on their way to nowhere and save you a lot of time and effort in your research.
When I originally wrote the article, I noted that four of the guru investors were currently holding the stock in their portfolio. This included:
Joel Greenblatt
George Soros
John Hussman
Robert Olstein
Since that time, Greenblatt and Hussman are the only two of the original four that are still holding the stock, and in fact, have added to their position. John Keeley has since joined in and purchased the stock.
It was agreed by virtually all investors at that time, that the electronics industry was hurting and the near-term future was uncertain at best for this industry. Yet as indicated below, Conn’s reversed the path that Radio Shack was on and has become the biggest success story of the lot, Walmart (WMT, Financial) and Target (TGT, Financial) began to exert their influence as low-priced leaders and have found their way back to growing their business, Best Buy (BBY, Financial) (well we all know they are struggling with their business model and are beginning to close some stores) and Amazon (AMZN, Financial) has surprisingly stood still. The RadioShack and Target agreement, which places Radio Shack within the Target stores at their electronic kiosks, has apparently done nothing to help the stock.
At the time of the original article, it was shown how RadioShack’s free cash flow was in a steady decline and that income, profit margins, EBITDA or earnings had flat-lined, indicating no growth at all. So, has anything changed?
While analysts are notoriously incorrect, it is still interesting to see what the expectations of Wall Street are for a particular stock. S&P is expecting that the earnings will drop an additional 28% from the already dismal performance of 2011 and an increase of revenue of approximately 2-3%. Adding that the selling of Verizon products may help, it will be a short-term boost at the very best.
In James Montier’s book, “Value Investing: Tools and Techniques for Intelligent Investing,” he discusses Bruce Greenwald and Judd Kahn’s book where they discuss a three stage process of analyzing competitive advantages. Directly, from the book:
(1) Identify the competitive landscape in which the firm operates. Which markets is it really in? Who are the competitors in each one?
(2) Test for the existence of competitive advantages in each market. Do incumbent firms maintain stable market shares? Are they exceptionally profitable over a substantial period?
(3) Identify the likely nature of any competitive advantage that may exist. Do the incumbents have proprietary technologies or captive customers? Are there economies of scale or regulatory hurdles from which they benefit?
It only takes a moment to realize that some of these competitive advantages such as economies of scale, exceptional profits, captive customers, etc., can be assigned to RadioShack’s competitors, but clearly does not apply to them. They clearly have no moat and are a speck in a sea of large competitors.
A recent report indicates that Radio Shack has struck an agreement with Berjaya Retail, a private company, which will introduce RadioShack into Southeast Asia countries, eventually about 30 countries, by opening an estimated 1000 or more stores. Berjaya Retail mostly operates 7-11’s and Singer stores. I have difficulty seeing how this agreement will pull RadioShack out of the doldrums and make it a major world competitor. Not with the likes of Amazon, Walmart and Target.
But what can we say that has improved or that looks good for the value investor that is looking for a good buy?
Some of the metrics look absolutely tempting.
On the down side, 10-year EBITDA growth is -0.9%, 10-year free cash flow growth is -14.5%, inventory continues to grow in each of the last four years and account receivables are growing faster in proportion to revenues.
I have offered several articles that have favorable ratings based upon Benjamin Graham’s defensive strategy. RadioShack is no different. It rates high with this strategy and fails only on long-term earnings growth. So there you have it: some good, some bad. I’ll go back to my original question and ask, "Is it a great value or a value trap?" It’s about as cheap as it’s going to get. I hope I hear from some that read this article and explain their reasons for their answer to the question.
Ultimately, each investor must make a decision that satisfies his thought process. I will conclude with more finality than my original article by concluding that I see no long-term successful future for RadioShack and end by stating that I believe this stock to be a value trap.
Good investing to all!
Disclosure: No position
The article was entitled, “RadioShack: Value or Value Trap?” and what immediately struck me upon reading it was that I had asked the question in the title, but was rather vague in my answer. What was clear was that I wasn’t enthralled with the company. Having read some additional material, I decided to take a second look to see if my opinion, vague as it was, had altered over the last year. After all, I had just come across an article stating that the cable personality we all know as Jim Cramer had visited a RadioShack and had a bad experience with their service, and therefore concluded that the stock would go nowhere. So, I wondered aloud, I must have been correct…. right? (Not really.) If I concluded that a stock was going nowhere because of poor customer service, I can give you a quick list of hundreds of companies that are on their way to nowhere and save you a lot of time and effort in your research.
When I originally wrote the article, I noted that four of the guru investors were currently holding the stock in their portfolio. This included:
Joel Greenblatt
George Soros
John Hussman
Robert Olstein
Since that time, Greenblatt and Hussman are the only two of the original four that are still holding the stock, and in fact, have added to their position. John Keeley has since joined in and purchased the stock.
It was agreed by virtually all investors at that time, that the electronics industry was hurting and the near-term future was uncertain at best for this industry. Yet as indicated below, Conn’s reversed the path that Radio Shack was on and has become the biggest success story of the lot, Walmart (WMT, Financial) and Target (TGT, Financial) began to exert their influence as low-priced leaders and have found their way back to growing their business, Best Buy (BBY, Financial) (well we all know they are struggling with their business model and are beginning to close some stores) and Amazon (AMZN, Financial) has surprisingly stood still. The RadioShack and Target agreement, which places Radio Shack within the Target stores at their electronic kiosks, has apparently done nothing to help the stock.
At the time of the original article, it was shown how RadioShack’s free cash flow was in a steady decline and that income, profit margins, EBITDA or earnings had flat-lined, indicating no growth at all. So, has anything changed?
While analysts are notoriously incorrect, it is still interesting to see what the expectations of Wall Street are for a particular stock. S&P is expecting that the earnings will drop an additional 28% from the already dismal performance of 2011 and an increase of revenue of approximately 2-3%. Adding that the selling of Verizon products may help, it will be a short-term boost at the very best.
In James Montier’s book, “Value Investing: Tools and Techniques for Intelligent Investing,” he discusses Bruce Greenwald and Judd Kahn’s book where they discuss a three stage process of analyzing competitive advantages. Directly, from the book:
(1) Identify the competitive landscape in which the firm operates. Which markets is it really in? Who are the competitors in each one?
(2) Test for the existence of competitive advantages in each market. Do incumbent firms maintain stable market shares? Are they exceptionally profitable over a substantial period?
(3) Identify the likely nature of any competitive advantage that may exist. Do the incumbents have proprietary technologies or captive customers? Are there economies of scale or regulatory hurdles from which they benefit?
It only takes a moment to realize that some of these competitive advantages such as economies of scale, exceptional profits, captive customers, etc., can be assigned to RadioShack’s competitors, but clearly does not apply to them. They clearly have no moat and are a speck in a sea of large competitors.
A recent report indicates that Radio Shack has struck an agreement with Berjaya Retail, a private company, which will introduce RadioShack into Southeast Asia countries, eventually about 30 countries, by opening an estimated 1000 or more stores. Berjaya Retail mostly operates 7-11’s and Singer stores. I have difficulty seeing how this agreement will pull RadioShack out of the doldrums and make it a major world competitor. Not with the likes of Amazon, Walmart and Target.
But what can we say that has improved or that looks good for the value investor that is looking for a good buy?
Some of the metrics look absolutely tempting.
On the down side, 10-year EBITDA growth is -0.9%, 10-year free cash flow growth is -14.5%, inventory continues to grow in each of the last four years and account receivables are growing faster in proportion to revenues.
I have offered several articles that have favorable ratings based upon Benjamin Graham’s defensive strategy. RadioShack is no different. It rates high with this strategy and fails only on long-term earnings growth. So there you have it: some good, some bad. I’ll go back to my original question and ask, "Is it a great value or a value trap?" It’s about as cheap as it’s going to get. I hope I hear from some that read this article and explain their reasons for their answer to the question.
Ultimately, each investor must make a decision that satisfies his thought process. I will conclude with more finality than my original article by concluding that I see no long-term successful future for RadioShack and end by stating that I believe this stock to be a value trap.
Good investing to all!
Disclosure: No position
