The Race To Zero: RadioShack

| About: RadioShack Corporation (RSH)

Whenever I walk past the local RadioShack (NYSE:RSH), I'm baffled by the rare occasion of finding anybody in there besides the employees. The fact that it's still in business is one of the Seven Wonders of the World. Of course there will always be people buying technology: televisions, cell phones, speakers, and countless other things; and while people will always be buying technology, will they always be buying from RadioShack? It doesn't seem like investors believe so, because the stock has been on a rapid decline over the past years. From June 10th, 2010 to June 8, 2012 the stock price has gone from $22.51 to $4.34, an 80% decrease in value. Factor in the $1 paid in dividends over that time and it's still an ugly 76% decrease. Some value investors may perceive this as a great buying opportunity as the stock has hit historical lows; but in the stock market, the only sure bottom is at zero.

At the downward rate earnings are headed in, it seems like zero may not be so unfathomable. Here is a table of some recent RSH earnings (year over year) to give you an idea:


Prior Year EPS

Difference ($) Difference (%)
Q3'11: $.15 Q3'10: $.37 ($.22) (59%)
Q4'11: $.12 Q4'10: $.51 ($.39) (76%)
Q1'12: ($.08) Q1'11: $.33 ($.41) (124%)
Click to enlarge

But RadioShack isn't all bad; there are some positive things to look at. First off is the fat dividend, because at 11.5% it can be very tempting. (But buying a stock purely on the basis of a high yield can be extremely dangerous, especially when the underlying company is losing its earnings power). Besides the juicy yield RadioShack also has a very strong balance sheet: $566.4 million in cash and $674.9 million in debt, while sporting a book value of $7.44 per share (trading at 0.59 times tangible book value). So there's a "glass half full" side to the story.

Now back to the bad; let's start with margins. An operating margin of 2.96% and a net profit margin of 0.67% leave very little room for error; and in this sensitive economic environment it's crucial to have enough marginal security to weather a slow economy. In addition management hasn't been too effective, only returning 3.42% on equity over the last year. Many investors seem to feel that the bad outweighs the good because, with 34.7% of floating shares borrowed short, there is extremely poor investor sentiment; and investor sentiment is what controls the market.

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Fierce competition from innovative companies like Amazon (NASDAQ:AMZN) only further RadioShack's dilemma. RadioShack is a name long forgotten by the average consumer, while Amazon is currently a growing household name. When shopping via Amazon you could be laying in your bed in pajamas with a laptop. For many people it just doesn't get much better than that. And although Amazon has a sky high P/E of 180.41, there is much better opportunity for growth, while also holding a broader consumer base than RadioShack.

So whether it's by the numbers or just plain old social awareness, it's not very difficult to see that RadioShack faces strong headwinds. But you never know the end until the end. Although unlikely, RadioShack could completely turn things around, otherwise it may just end up like the tragic Circuit City which still haunts investors to this day.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.