Today was a bloodbath on Wall Street. The S&P 500 was down 2.28% and while that doesn't put today anywhere near the list of top twenty worst days, it's still pretty bad. What was most interesting was that RadioShack (RSH) was up 3.33% for the day. This rise has been attributed to the ad that was shown during last night's Super Bowl. Investors feel that RSH is starting down a path of rebranding and taking steps in the right direction to turn themselves around.
In the last decade, RSH's net income has fallen from $299 million to -$139 million. This loss is mostly from the fact that most people are buying their electronics online (the only person I know who still goes to RadioShack for their electronics is my uncle [aged 58]). Basically, RSH is suffering from the same downturn as Best Buy (BBY) but with an even older business model. In their most recent 10-K (filed 2/26/2013) they list two factors that they believe puts them above the competition -
"Management believes two primary factors differentiate us from our competition. First, we have an extensive physical retail presence with convenient locations throughout the United States. Second, our specially trained sales staff is capable of providing cost-effective solutions for our customers' routine electronics needs and distinct electronics wants, assisting with the selection of appropriate products and accessories and, when applicable, assisting customers with service activation."
Going through these two factors one can quickly see that RSH doesn't have much advantage over a company like BBY. If BBY has been fighting an uphill battle these last few years, all the moreso has RSH.
With all this said, I was surprised to see RSH up so much today while the broad markets bled. I was so surprised that I mentioned it to my wife who was shocked. She works for an online retailer selling products on Amazon (AMZN). In the past she has bought stuff from RadioShack to sell for a profit on Amazon. Clearly, consumers don't realize that they can get the product on RadioShack's website, otherwise they would be going there. Instead they come to Amazon and pay a premium, never once thinking of RadioShack. So, to hear that investors are showing a vote of confidence in RSH made us both wonder what was up.
But what is really bothering me, and the real reason for my writing this article, is that unless investors think the stock can return an average of 20% over the next 5 years, I don't understand why investors would choose RSH stock over their bonds?!
RadioShack has $498 million in debt according to their most recent 10-Q. The bulk of this is their 6.75% unsecured notes payable in May 2019. A quick look at FINRA tells us that the bond last traded today for 60. FINRA also can tell you the yield-to-maturity based on the latest price, which in this case is 19.102%.
Of course, this return will only be received if RSH can make its interest payments and pay off the notes come May 15, 2019. That being said, if RSH can't make such payments then the bond is still in a better position than the stock, with a greater claim on assets and earnings than the common stock. (Keeping all this in mind there is a good chance the bond will show some gains before May 2019 should RSH operations show improvement.)
On the flip side, if all goes well, the stock must do better than an annualized gain of 19.1% over the next 5 years to be the better choice. With no dividend, this would translate to a stock price of $6.24 or a gain of 151.43% from today's close. Even with such numbers, this will only break even with the bond. And all that time will be spent with the possibility of no dividend and no prior claim on assets should RadioShack default. Unless one can say with great confidence that they feel the stock will show such gains, they would be better off with the bond.
Of course, both are speculative purchases. This article is merely trying to point out that if one is looking for a long-term speculation they may do better with the 6.75% bond than with the RSH stock.
Additional disclosure: I may choose to initiate a position in RadioShack 6.75% Notes due May 2019.