Radio Shack’s Situation
While the company is clearly struggling with a number of secular challenges, its price-to-book ratio of less than .6 has attracted the attention of many value investors. Of course, there is an underlying reason for this persistent undervaluation: the company had a return-on-equity metric of minus 20 percent during 2012 and continues to produce dismal returns for its shareholders. In the past three years, RadioShack Corporation (NYSE:RSH)’s stock price has declined from a closing high near $23.50 in April of 2010 to a closing low below $2 per share in early December of 2012. Since then, it has rebounded somewhat and now trades between $3.50 and $4 per share.
Competitors and Long-Term Outlook
In recent months, Radio Shack has been buffeted by investor dissatisfaction and analyst downgrades. In fact, the company’s stock now trades above its consensus price target. In this environment, “caution” is the watchword for short-term investors who wish to play Radio Shack for a bounce, as well as long-term investors who believe that the company can turn itself around in the near future.
To reiterate, Radio Shack is not in a strong competitive position. The company faces competition from larger, healthier Best Buy, as well as various online and big-box retailers. With profit margins on electronics items dropping substantially in recent years, Radio Shack’s reliance on its physical locations may well spell its doom.
From a fundamental standpoint, the company’s lack of crushing debt might be its saving grace. While it does carry somewhat more debt than cash, its ratio is moderate and should not serve as a cause for concern. Although the company burned through $43 million in cash during the 2012 fiscal year, investors who believe that Radio Shack’s cash hoard will save it from total collapse in the near term may well be encouraged by its low valuation.
Potential Plays
Investors who believe that Radio Shack might ultimately serve as a buyout target for a larger company like Best Buy or Target might be inclined to open a long position in the stock at its current levels. Those who agree with this sentiment in principle might insulate themselves from short-term price moves by offsetting their long plays with in-the-money covered calls or other hedging instruments. At the same time, it seems unlikely that Radio Shack would fetch more than $5 or $6 per share in a potential merger or buyout.
Obviously, the more popular RadioShack Corporation (NYSE:RSH) trade would involve a short position. Investors who bet that the recent run-up was nothing more than a dead-cat bounce might do well by opening a short position above $3.50 and riding the stock down to its 2012 lows near $2. However, this is a crowded trade: at the moment, short shares represent over 34 percent of Radio Shack’s total float. In fact, a short squeeze might be at least partially to blame for the company’s recent market-beating performance.
In sum, RadioShack Corporation (NYSE:RSH) is a distressed company that may yet offer interesting opportunities for seasoned investors. Those who believe in the company’s turnaround potential could leverage its upward price momentum for further profit. Those who agree with the recent analyst downgrades might be inclined to open short positions at these somewhat elevated levels. In either case, investors must do their own due diligence before committing to such a risky and volatile stock.
The article Does This Company Have Lots of Value, Or Is It Plummeting to Its Death? originally appeared on Fool.com and is written by Mike Thiessen.
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