Viking Posted January 19, 2011 Share Posted January 19, 2011 I am sure many people have an opinion on Radio Shack. I think of Buffett's purchase of Dairy Queen. When he made the purchase I scratched my head as the DQ in my city was old and run down but was in a good location and had decent traffic. Perhaps the focus is how much cash the business throws off and how sustainable the moat is... RBC estimates RSH will earn $2.00 in 2011 ($1.84 in 2010). Shares trade at $17.11; 2011 PE = 8.56. Dividend = $0.25/share = 1.5%. The company has cash on hand about equal to debt (no debt issues). They recently spent $300 million buying back >10% of their stock outstanding. Earnings have been growing nicely the past few years driven by wireless sales. Tablet sales will be gravy. Yes, they will lose the kiosk business at Sam's Club June 30 2011; this loss has been built into the earnings estimate above. Why is the stock trading so low? Concern about the sustainability of RSH earnings; seems like everyone is waiting for them to begin the death spiral. What I find interesting is RSH just refuses to play along and the business just seems to keep spitting out the cash. Here is a good summary: seekingalpha.com/article/245934-why-radioshack-is-still-relevant?source=yahoo Link to comment Share on other sites More sharing options...
prunes Posted January 19, 2011 Share Posted January 19, 2011 Even CEO Can't Figure Out How RadioShack Still In Business 'Nuff said. Link to comment Share on other sites More sharing options...
Myth465 Posted January 19, 2011 Share Posted January 19, 2011 The Onion has a very creative writing team. "There must be some sort of business model that enables this company to make money, but I'll be damned if I know what it is," Day said. "You wouldn't think that people still buy enough strobe lights and extension cords to support an entire nationwide chain, but I guess they must, or I wouldn't have this desk to sit behind all day." Radio Shack is or should be a dying business inmo. I wouldnt look for more than 7-8x CF. I would say its fairly priced. Link to comment Share on other sites More sharing options...
Viking Posted January 19, 2011 Author Share Posted January 19, 2011 prunes, based on that article, looks to me that RSH must be the perfect company (even an idiot can run it and it keeps on going). Here is another positive article that talks to possible upside driven by growing wireless sales and tablets: seekingalpha.com/article/245952-radioshack-plugs-into-a-24-9-billion-industry?source=qp_article Link to comment Share on other sites More sharing options...
onyx1 Posted January 19, 2011 Share Posted January 19, 2011 RSH has a niche market and I don't believe they are going away. They inventory alot of hard to find products (cables, speaker wires, AC/DC converters, etc.) that allow them to charge 45% gross margins. The stores are small, convient, and the salespeople are knowledgeable. I frequent them because parking is easy and the stores are closeby. I dont see Best Buy putting them out to pasture any sooner than Supermarkets will kill the 7-11 franchise. With a 15% FCF/EV yield, no net debt, and a history of share repurchases (they bought back 8% of their stock last quarter) I think RSH is compelling. Link to comment Share on other sites More sharing options...
S2S Posted January 19, 2011 Share Posted January 19, 2011 Julian Day is a very, very smart man. A co-worker of mine who happens to be far more well-versed in the subject matter has likened Day to Howard Schultz of Starbucks. Mobile phone retail seems like a fragmented market. Should RSH continue to gain traction in this business through a combination of a-store-inside-a-store model and standalone kiosks, it could become the US' version of a Carphone Warehouse. Link to comment Share on other sites More sharing options...
value-is-what-you-get Posted January 19, 2011 Share Posted January 19, 2011 You guys are aware that The Onion is a satirical publication right? A modern Mad Magazine. What - Me Worry? ;D Link to comment Share on other sites More sharing options...
Viking Posted January 19, 2011 Author Share Posted January 19, 2011 Here is a link to RSH Q&A at Goldman Sachs Retailing Conference in Sept 2010. Mgmt looks to know what they are doing. Should positive progress continue my guess is you will see another large share repurchase as they use their large amount of excess cash (perhaps the last stock purchase is what drove the price to $23). http://files.shareholder.com/downloads/RSH/1135297164x0x403418/a99c41fe-e280-4e95-be45-78d681f0a358/9.14.10%20Goldman%20Sachs%20Retail%20Conference%20Transcript.pdf Link to comment Share on other sites More sharing options...
Myth465 Posted January 24, 2011 Share Posted January 24, 2011 This is interesting. http://money.cnn.com/2011/01/24/news/companies/retail_stores_inside_stores.fortune/ Sears is carving out about 15% of the square footage its Costa Mesa, California store to house the much trendier retailer Forever 21. Target (TGT, Fortune 500) will have 1,450 Radio Shack-run mobile phone shops in its stores by the end of June. And Wal-Mart Realty says it has almost 400 in-store leases ready for some well-matched retailer who sees the benefit of letting "Wal-Mart's repeat customers become [their] repeat customers." Wal-Mart (WMT, Fortune 500) has a lot of competition, as Sears Holdings (SHLD, Fortune 500) is offers thousands more such sub-lease opportunities within its own Sears and Kmart stores. Link to comment Share on other sites More sharing options...
gokou3 Posted January 24, 2011 Share Posted January 24, 2011 CEO Julian Day retiring: :o http://finance.yahoo.com/news/RadioShack-Corporation-to-prnews-2804066999.html?x=0&.v=1 Link to comment Share on other sites More sharing options...
Viking Posted January 25, 2011 Author Share Posted January 25, 2011 The earnings warning is not surprising given what other electronic retailers have recently reported; the risk of an earnings warning was the reason the stock had fallen the past couple of weeks. The CEO retiring is unfortunate but I am not sure this warrrants an 11% decline in the share price... Link to comment Share on other sites More sharing options...
onyx1 Posted January 25, 2011 Share Posted January 25, 2011 Mr. Market isn't giving enough consideration to share repurchases and the potential for more to come. 6/30/2010 shares outstanding were 125.4 1/25/2011 shares outstanding are 105.6 Remaining authorization available to repurchase shares is $101mm, or at current price another 6.4mm. If RSH continues to execute repurchases at these prices (they probably will since stock price is at a 52-week low) the share count will be 99.2. This would represent a 21% decrease in share count in five months. With FCF/EV running at around 15% they have huge potential to buy themselves out. The management change isn't an issue with me. Read though the GS panel the Viking posted above and it is clear that the new CEO is the one who is operationally engaged. Here is another take: http://seekingalpha.com/article/248247-radioshack-recent-sell-off-a-compelling-value-opportunity?source=yahoo and another, http://seekingalpha.com/article/248186-radioshack-ceo-jumps-ship-eps-below-expectations-why-these-are-not-reasons-to-sell?source=yahoo with the following money quote (my emphasis): "The departure of the CEO could mean renewed interests from a financial or strategic buyer as it would be easier for the company to come back to the negotiating table and accept the lower price it previously turned down. This is especially true with RSH's stock now down about a third from where it was trading during the well-publicized buyout negotiations last summer that apparently fell apart over the take-out price. For example, a $22/share deal would offer a 42% premium to the current price for shareholders and still be well below the mid-$20's price that private equity was reportedly interested in paying for RSH. $22 would only be 5.4x EBITDA, a big discount to recent retail buyouts of Gymboree at 6.8x and JCrew (JCG) at 8.6x. Thus, the silver lining in today's news is that a deal just became far easier to achieve given there is a price that could make everyone happy." Link to comment Share on other sites More sharing options...
Carvel46 Posted January 26, 2011 Share Posted January 26, 2011 The first article uses EBITDA in valuation. Very misleading. Onyx1: Are you using a Maintenance CapEx to calculated your 15% FCF yield? Link to comment Share on other sites More sharing options...
onyx1 Posted January 26, 2011 Share Posted January 26, 2011 TTM: (NI $225mm + D/A $87 + AT Interest $28mm - Cap Ex $66mm) / EV $1758mm I'm using all Cap Ex as they havent opened any new store in years. This is probably conservative since they have invested in new Kisok's. Link to comment Share on other sites More sharing options...
roundball100 Posted February 2, 2011 Share Posted February 2, 2011 Even CEO Can't Figure Out How RadioShack Still In Business 'Nuff said. I found the Onion article quite a fun read ... and it sort of highlights, in its own way, why Radio Shack still seems to work. In any case, with the stock down near $15, the investment thesis seems reasonable. The long-standing and never-ending rumors of a buy-out are upside. Link to comment Share on other sites More sharing options...
bmichaud Posted February 23, 2011 Share Posted February 23, 2011 Is anyone else licking their chops over RSH right now? $200mm of eanings, 105mm shares out, ~$100mm left in the BB program, and buyout potential. I don't see it lasting long at these levels without an Icahn stepping in. Thoughts? Link to comment Share on other sites More sharing options...
Guest Bronco Posted February 23, 2011 Share Posted February 23, 2011 I'm not a technician but the chart looks great. Link to comment Share on other sites More sharing options...
Guest Bronco Posted February 23, 2011 Share Posted February 23, 2011 What was the average price per share on their buyback in Q3? From my 2 second analysis it looks like they took 300M in cash and flushed it down the toilet. Like a turd. Like RSH stock. Sorry, being repetitive. Link to comment Share on other sites More sharing options...
bmichaud Posted February 25, 2011 Share Posted February 25, 2011 Average price paid was ~$20. I agree - probably not the best price to be buying in stock given that EPS at the time was ~$1.60. Previously, I incorrectly calculated the increase in per share intrinsic value b/c I did not take into account the reduction in cash per share as a result of the buyback. Regardless - the stock is at a very attractive level at this point. Link to comment Share on other sites More sharing options...
bmichaud Posted February 28, 2011 Share Posted February 28, 2011 I will admit that I question my judgment on almost a daily basis when investing in a non-moat company such as RSH. I much prefer to buy something that time is the friend of at a reasonable price and just sit back. Those are the companies I am primarily attracted to, so the price on a RSH has to be pretty attractive for me to be interested. True to form though, I started off loving the investment but am now questioning whether earnings are sustainable. My gut says that at the current level the growth on the wireless side and the decline on the legacy side essentially wash, and I get any above-expectation growth on the wireless side for free. With a limited amount of net debt, financial distress is unlikely, and there is a reasonable chance for it to attract takeover interest. So is this a reasonable bet at between 8 and 9.4x earnings? Would I be short sighted by going with the argument that the brand is anachronistic and earning power is limited? I am struggling between investing in these types of magic formula stocks (RSH is not on the MF site, but is similar to ones on there) and high quality businesses that, if necessary, can be held for long periods of time. I realize Buffett manages such large sums that he essentially has no choice but to hold forever, but I really tend to side with his and Munger's conclusion that buying high quality businesses is the way to go. No matter what, it comes down to buying $1 bills for 50 cents - I just would prefer a $1 bill that is growing (I.e. MCD) versus one that is declining slowly (I.e. RSH), but also believe there is opportunity in an RSH. Interested in other's thoughts on RSH specifically and the differences in $1 bills. Thanks in advance. Link to comment Share on other sites More sharing options...
DCG Posted February 28, 2011 Share Posted February 28, 2011 RSH has a niche market and I don't believe they are going away. They inventory alot of hard to find products (cables, speaker wires, AC/DC converters, etc.) that allow them to charge 45% gross margins. The stores are small, convient, and the salespeople are knowledgeable. I frequent them because parking is easy and the stores are closeby. I dont see Best Buy putting them out to pasture any sooner than Supermarkets will kill the 7-11 franchise. With a 15% FCF/EV yield, no net debt, and a history of share repurchases (they bought back 8% of their stock last quarter) I think RSH is compelling. How do they have hard to find products? You can find pretty much every single product they sell on Amazon, often for about a 10th of the price. Link to comment Share on other sites More sharing options...
Carvel46 Posted February 28, 2011 Share Posted February 28, 2011 I'd rather walk down the street to Radioshack to buy nickel hydride batteries (10 minute walk from my apartment). For a $20 item, I'm not very price sensitive and care more about convenience! Link to comment Share on other sites More sharing options...
bmichaud Posted February 28, 2011 Share Posted February 28, 2011 Well, I am going to answer my own question with regards to RSH. I'm bored at work right now, so I've been working on the valuation a bit. 2010 EBIT is ~$375 and the tax rate is 39% for NOPAT of ~$229. That includes deprec of ~$80, and mgmt says maintenance is around $60, but we'll stick with $80 for conservatism. Net operating assets are $913, and are funded with $71 of net debt and $842 of equity. Using those respective weights, pre-tax cost of debt of 5% and a cost of equity of 10%, WACC is ~9.5%. TEV comes out to $2,420 assuming no growth, and after subtracting net debt and dividing by 107 fully diluted shares, intrinsic value per share is ~$22 per share. Using a 3% decline rate, IVPS is $16.51. The catch here is that WAY too much equity is being employed to fund net operating assets - currently ~92%. If RSH used 50% of cash and did a BB at $15 per share, IVPS would rise to $32 assuming no GR, and $21 assuming a 3% decline. If that occured, net debt as a percentage of NOA would then be 40 percent, and net debt to EBITDA would still be less than 1x. It does not make sense to fund 92 percent of NOA with equity at a cost of 10 percent when net debt to EBITDA is less than .50x. Bringing net debt up to 40 percent of net operating assets is very reasonable and much more shareholder friendly. (Note: I am defining NOA as total assets minus cash minus total non-interest bearing liabilities) Link to comment Share on other sites More sharing options...
Myth465 Posted February 28, 2011 Share Posted February 28, 2011 I dont know 9x earnings seems fine for a retailer treading water or even doing ok in this environment. Isnt Best Buy at 10x? Link to comment Share on other sites More sharing options...
bmichaud Posted February 28, 2011 Share Posted February 28, 2011 I'm trying to look at it from a private owner's perspective due to its size and I don't think, based on the amount of cash there is relative to debt, that a private owner would pay the current price. The case against that though is whether these earnings are sustainable. Maintenance capex is around $60m and dep is $80, so there is that bit of cushion. Then you have the growing wireless side. I could be completely wrong, but I think I would end up kicking myself if I was not in it here, particularly after doing the above analysis of how that cash can be effectively deployed to increase per share intrinsic value via buying in shares at these levels. Link to comment Share on other sites More sharing options...
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