Radio Shack: No Dust on This Deep Value Stock

Includes: GOOG, RSH, S, T, WMT
by: Mycroft Friedrich

The world has become a very dangerous place for the small investor to operate in as things are moving so fast that it’s hard to keep up with what’s happening around the world. Besides that you have hidden dangers in the stock market itself, such as Flash Traders, who in a millisecond can trash a company if it misses on its earnings estimates. Their actions usually start a domino effect that panics other traders out of the stock and if you are a long term investor in a stock that has a slight earnings miss, you could go down 10-20% in one trading day. This is not the type of environment that I enjoy operating in, always worrying if my holdings will miss on their estimates and get trashed in the process. So I have searched for a better way.

The way I have decided to invest from now on is to invest in deep value plays and instead of spending my time looking for companies making new highs every day, I am looking for one’s making new lows instead. I take that new lows list and then use my Mycroft Research System to analyze them and see if they have value. Every once and a while I hit on a stock that I find is extremely mispriced and buy it for my clients. One stock that is extremely attractive these days, based on my screening system, is Radio Shack (NYSE:RSH). It is a stock that has fallen so low, relative to its true value, that I classify it as a “steal it” stock, as I feel that the stock market is letting me “steal it” at its current price. The following analysis will show you why I think so.

The main thrust of this analysis is concentrated in three parts. The first two parts are based on owner earnings (future and historical) and the third is based on historical price action as a gauge of investor sentiment.

Before we get to the analysis let me give those new to my Mycroft Research (MR) System some links to show you how it all works.

The three methods used in this analysis are:

  1. Price to Owners Earnings (OE) = Future analysis
  2. Cumulative Owners Earnings (COE) = Historical analysis of owners earnings
  3. Statistical Indicator Analysis (SIA) = Historical price action

Analysis of Radio Shack (RSH)

RadioShack Corporation operates a chain of consumer electronics/service stores. Product lines include electronic parts and accessories, wireless, PCS and conventional telephones, audio and video equipment, direct-to-home (DTH) satellite systems, computers, general and special purpose batteries, and other electronic products. Has 6,563 total retail locations including kiosks.

When I first introduced Radio Shack to my clients, their first reaction was “Aren’t they bankrupt yet?” When you are a Deep Value Investor, these are the type of comments you like to hear as it tells you that you are at what Sir John Templeton used to call “the point of maximum pessimism”. Most investors hearing comments like that would stay away thinking that Radio Shack probably doesn’t have much in the way of customers and that their financials must be terrible. I am here to show you that Radio Shack has some of the best long term results of any company I have run through my system. Yes, It’s not April 1 yet and I am not playing a prank on you. Here are Radio Shacks numbers so you can see for yourself the facts.

The following is a table containing Radio Shack’s historical Owner Earnings Data:

So what does the table above tell us as investors? The first thing to notice is that the company has not had a negative year in its entire history and not only that but that it has generated $49.92 a share in cash flow since 1973 and that it only used $18.24 a share in capital expenditures during that time. This resulted in Owner Earnings per share of $31.68 for a stock that is selling for $13.95. It is also estimated to have $2.11 in 2011 Owner Earnings per share, which tells us that it is currently trading at 6.61 times its estimated Owner Earnings. From there we also notice that the company is an extremely efficient operator as it has a CapFlow of just 26%, which tells us that 74% of their Cash Flow is Free Cash Flow.

Here are some charts to show you how attractive this company is as a Deep Value Play:

As you can tell from the SIA % chart that Investor Sentiment is very negative on the stock, while the numbers for the last 4 decades have been solid. So you have strong financials with negative investor sentiment and since numbers don’t lie, eventually the numbers will win out and if there is just one piece of positive news from the company, like an earnings surprise, you could see a large pop to the upside.

Radio Shack is unique as they have some 6,500 stores that have been the centerpiece of small town America for as long as I remember, In the town that I grew up in, the bookstore is gone, the toy store is gone and the clothing stores are gone, but that same Radio Shack from 45 years ago is still in the same spot. For those of us who live 50 miles away from the nearest mall or 20 miles from the nearest Wal-Mart(NYSE:WMT), we can go 3 miles down the street and get what we need, as I have three Radio Shack’s within 10 miles of my house. I couldn’t believe my eyes when I first saw the stock selling at such a deep discount to its numbers, so I got in my car and ran over to the nearest Radio Shack to check it out in person.

I walked in and saw a totally modern store with smart phones from multiple carriers (AT&T (NYSE:T), Sprint (NYSE:S) and T-Mobile) as well as Virgin and Boost Mobile. The sales assistant came over and started explaining the phone plans and I didn’t have to wait in a long line to get helped. I had my choice of BlackBerry( RIMM), HTC, and Google (NASDAQ:GOOG)Android phones from Samsung, Motorola (MOT) etc.. From there I asked her why so many of the phones said free on them and what was the catch? She told me that if I signed up for a two year contract that the phone is free with an instant rebate. I asked her about the instant rebate and said “so I have to pay $50 now and then mail in the rebate to AT&T or Sprint and hopefully I may see my money back in 6 months?”. She said ”no, if you buy your phone at Radio Shack we will give you an instant rebate at the time of purchase”. That impressed me greatly.

I also noticed that I didn’t see any Radio Shack brand products with years of dust on them like I used to in the old days, but saw everything packaged in high multicolor boxes that were beautifully designed. These products were the old Radio Shack store brand products, but the name Radio Shack was nowhere to be found on the packaging. Not only that but they took the first four letters from Energizer and the last four letters from Duracell and renamed their Radio Shack battery line ENERCELL, which I thought was brilliant.

Sure, the company has some problems, but you need to expect some when buying deep value stocks. For example they lost the Kiosk account at Sam’s Club (WMT) but won the account at Target (NYSE:TGT). Their innovative CEO is leaving the company, but his #2 is taking over and having spoken to three separate store managers, they have heard no real changes coming due to a CEO change. The current CEO is also selling a ton of stock from what I hear, but he has totally transformed the company and all you need to do is go to your local Radio Shack and you can see with your own eyes that this is no longer your fathers 1970’s electronics store. In closing here are the final Mycroft Research Results for Radio Shack:

Disclosure: I am long RSH.