Thursday, November 19, 2009

What's RadioShack worth? (RSH)

Barrons Online is out this morning suggesting that investors take some gains in Radioshack(RSH) after recent outperformance.

While they note the company's decent performance, they see the shares fairly valued at current levels.

At 11.9 times consensus earnings estimates for 2010, RadioShack trades at a below-market multiple. Unfortunately, that could still be full value for a company that is not growing its store base and will continue to face competition from larger rivals. "What kind of multiple do you put on a retailer in a very competitive market with no organic growth prospects," wonders Anthony Chukumba, senior research analyst at FTN Equity Capital Markets. "Eleven or 12 times sounds about right to me."... Given the lack of new stores, those same-store sales will have to grow if the company wants to boost earnings, according to Standard & Poor's Equity Research analyst Michael Souers.

I would tend to agree, but a Price-to-Earnings ratio neglects the company's $6.70 per share in balance sheet cash. If you "net out" that cash, then the stock appears much cheaper. Many would say "wait, they have as much debt as they do cash, so why net it out?" Because in a given quarter, RadioShack is covering their interest expense 7-10 times -->> an extremely comfortable cushion.

The company's massive cash balance, combined with free cash flow, pushed the "net" Free Cash Flow Yield to 126% earlier this year -->> a screaming buy amid the market panic in March. Current FCFY is 10%, and "Net of cash" it's 14%. Tempting, but this is a dangerous industry, so I'm not sure that yield is enough compensation for the risks involved.

Copyright 2009 AlphaNinja


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