Value Investing Ain’t Always Pretty: RadioShack
The financial signals scream buy at RadioShack (RSH), with a P/E ratio currently under 10 (and a corresponding earnings yield over 10), steady if barely-rising revenue and profit, and a management using its cash to buy back what is arguably a cheap stock, sharply reducing shares outstanding.
How, one wonders, are they doing that on RadioShack’s traditional assortment of battery rechargers, schlocky electronic toys and tiny electrical components?
The answer is, they aren’t. RadioShack has turned itself into a mobile phone retailer – hawking Sprint (S), AT&T (T) and T-Mobile handsets and contracts at its roughly 4,500 company-operated stores. Wireless sales accounted for 47.6% of revenue last year, up from 32.9% just two years earlier, and are expected to keep rising as a percentage of revenue.
The overall numbers earn RadioShack an attractive rating from YCharts Pro, which finds the shares undervalued and the fundamentals strong.
As with some other faded brand names that are now value stocks – H&R Block (HRB) and Pitney Bowes (PBI) come to mind – there are warts. But first, the good news. After a multi-year period of consecutive declines in same-store sales, RadioShack has put together two years of modest increases (2009: 1.3%; 2010: 4.4%). Cash rolling in has been spent on RadioShack shares, in five years time reducing the number outstanding by about 22% to 105.7 million.
(Give management credit for knowing a cheap stock; when RadioShack shares dipped below $7 in early 2009, stock options were loaded up for executives. Julian Day, the CEO who is retiring next month, snagged one million options priced at $7.05, vs. today’s $16 and change. That’s nine million reasons to have a happier retirement.)
The cash hoard has declined some, but even with the aggressive buybacks RadioShack’s balance sheet looks decent.
The worries here are twofold. One, the old stuff you used to go to RadioShack for could not sustain the chain. Though high-margin, the junk just didn’t move any more. RadioShack annual inventory turnover was just 2.9 in 2006 (“Ernie, it’s your turn to dust the displays.”) With the shift to cell phones, inventory turn was about 3.5 the last three years.Two, RadioShack has become a middleman in a consolidating industry. AT&T (with its deal to buy T-Mobile) and Verizon (VZ) dominate mobile phones, and they will have increasing sway to dictate terms to retailers. RadioShack has already gotten into a beef with T-Mobile, accusing the wireless company of breaching its contract with the retailer. A lull in cell phone innovation – upgrades drive a lot of sales – could hurt RadioShack and other retailers of wireless products, too.
The announcement of the departure of Day, 58, as CEO was made in January, and the company simultaneously disclosed that fourth-quarter results would disappoint. The shares tumbled 11% that day. Not a very nice way to send Day packing.
In his place, we get James Gooch, the CFO, who is 43. He’ll have some 1,450 kiosks in Target (TGT) stores by mid-year to hopefully boost wireless sales. And perhaps he’ll manage not to get squeezed when two of his biggest suppliers (AT&T and T-Mobile) combine. All he really has to do is keep overall revenue and profit sliding sideways. That would fund more buybacks and, with RadioShack EPS lifted up, attract value investors no matter how difficult the company’s task appears.
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