Earnings for RadioShack came out this morning, so by the time you read this, RSH could have sunk further or rocketed up on earnings surprise. Who knows?
And today, most of the info in this article is going to be old news, but I wanted to write something to reflect my thoughts regardless of how earnings turns out.
I can then let the earnings result or whatever management says on their conference call dictate whether my analysis and reasoning was objective and reasonable, and hopefully I'll be able to answer whether RadioShack is going to end up like Circuit City.
RadioShack Investment Overview
I've already laid out RadioShack's business model and to sum it in a quick sentence, RadioShack makes more than half its revenue from selling mobile phones and accessories.
Here is how I view RadioShack after my review of the numbers from the stock analysis spreadsheet.
Financial Statement Notes and Trends
Going down each line of the financial statements and comparing the last five quarterly statements shows that RSH is clearly struggling on the income statement.
There is no growth in revenue
COGS continues to increase slightly
All margins declining
RSH is actually receiving tax benefits because it is losing money in terms of net income
The only positive is that RSH buying back a lot of shares. Management has made it clear that they believe RSH is cheap. They were buying in the $7 range.
Seeing the negative trends from the income statement, the balance sheet should also be showing a sorry story, but surprisingly that is not the case.
Cash balance is at historical averages
Inventory has been managed well. Since they sell mostly phones and contracts anyways, inventory shouldn't be a problem going forward.
- No short term debt
- Long term debt has increased but they got a great deal. Paying interest of only 6.75% for unsecured notes.
- The bad sign is the declining shareholders equity.
Free Cash Flow
This is what the Q1 report said about FCF:
Our free cash flow, defined as cash flows from operating activities less dividends paid and additions to property, plant and equipment, was $24.9 million for the first quarter of 2012, compared with $46.3 million for the same period last year. The decrease in free cash flow for the first quarter of 2012 was attributable to decreased cash flows from operating activities as described above and the payment of our quarterly dividend in the first quarter of 2012.
I don't like to subtract dividends from FCF so I am going to add that back in to the equation. The report also clearly mentions capex which is great. Only shareholder friendly companies both to mention capex numbers.
Capital Expenditures: We estimate that our capital expenditure requirements for 2012 will range from $70 million to $90 million. Information systems projects and U.S. RadioShack company-operated store remodels and relocations will account for the majority of these anticipated capital expenditures. Cash and cash equivalents and cash generated from operating activities will be used to fund future capital expenditure needs.
If I extrapolate what they are saying, my guess is that 2012 FCF is going to come in around the $70 - $90m range. Owner earnings is going to be close to $0 on the negative or positive side. I.e. it could be -$10m or +$10m.
RSH Financial Ratios
Everything about RSH is in a serious decline and the ratios reflect that but the balance sheet is still solid.
RadioShack is a Net Net!
RadioShacks Net Current Asset Value is $3.88 per share. With the number of shares declining, the NCAV value could actually rise.
RSH has a solid balance sheet to support its current downturn and the NCAV should "technically" be the floor, but we all know how efficient markets are.
The fact that RSH is trading just below NCAV speaks volumes about what the market expects out of RSH. Absolutely nothing.
Stock Valuation Calculation
DCF minus the excess cash shows that RSH is worth about $1-$2 based on short term owner earnings in the $10m range.
A Graham formula valuation pegs the value around the $2 - $2.5x mark but earnings will likely decline so that range is in jeopardy.
EPV is actually negative but has a high asset reproduction value which confirms that RSH has no competitive advantage.
Despite all this, I bought a tiny position.
The thing to remember now is that RSH is no longer a typical investment. I didn't buy it based on a Buffett's principles but based on Graham's principles.
RSH is a net net
That is profitable
Has plenty of cash
Not burning through the cash
Has low interest rate payments
Shareholder friendly management actively trying to increase shareholder value
I doubt RSH will ever turn to its former days, but that's not why I hold net nets.
To answer the initial question of whether RadioShack will end up like Circuit City, I don't think so.
If you read my first article, you'll get the impression that I had no intention of owning RSH. But with these numbers, and looking at it from a different angle, it's a tiny investment that I am willing to wait to see how things turn out.