Description

RSH was posted on VIC in January 2002 when the stock was at $30 and an EV of $5.9 billion. Today, RadioShack's EV is $3.7 billion, down 37% since then, and the stock is at $23.30, down 20% after adjusting for dividends (note: there are 25% less shares outstanding due to free cash flow being used for buybacks).

tom208's post is quite detailed and has an excellent description of the business, so I'll try not to repeat much. As well-researched as that write-up was, at 11x EV/EBIT, RSH was simply not a bargain at the time. But now, at 6.5x EBIT and 5.4x EBITDA, it warrants another look.

For a company which has paid out, on average, $350 million per year over the last decade, RadioShack gets no respect from the market: the implied cash yield on it's $3.17 billion market cap ... 11.0%. And that isn't just "free cash", it's *actual* cash paid to shareholders. Obviously, there is more to the story.


Business Model:

The market appears to think Best Buy, cell phone outlets, et al will do to RadioShack what Home Depot did to the local hardware store, or what Walmart did to K-Mart and Winn Dixie. If so, then perhaps five years from now you will come back and read this and have a nice little laugh at my expense. If not, then this valuation is compelling.

I think RadioShack has a sound business model, even in the face of new competition. It's footprint makes it very attractive to just about any electronics product maker, as is evidenced by marketing deals with Skype, Comcast, Cingular, etc. And that industry will only continue to grow as technology improves.

RSH is not very asset-intensive for a retailer, thanks to well-managed inventory & capital. But they are leveraged to fixed costs, which can be a blessing or a curse. On the plus side, an outsized portion of new sales from anything exciting they can add to their shelves drops to the bottom line. This could payoff over the long-term with gaming, media, and entertainment such as iPod, which they recently added to their product mix. New products notwithstanding, their real business will probably remain batteries and cell phones. As for the flipside of the coin ... with fixed costs at >40% of revenue, a drop in same-store sales could quickly erode the bottom line.

In the end, the proof is in the numbers, and therein lies the biggest reason for confidence in RadioShack's business ... the new specialty concepts like Best Buy are not so new anymore, and yet RadioShack continues to put up good numbers and the cash to back them up. Average net income for the past 5 years is $286 million, while average CFO is $483 million.

While RSH won't be spinning off excess cash like they were when streamlining operations over the past decade (total assets are down from $3.3 billion to $2.3 billion), free cash flow should remain strong going forward, about equal to income (notwithstanding current remodeling CapEx and a Q3 $500M buyback they may have gotten ahead of themselves with).


Cingular "rollover":

All the eggs are pretty much one basket for next year. As of January 1, RadioShack will no longer be marketing Verizon products & services, one of its bread-and-butter product lines. It has signed a deal with Cingular to replace the Verizon relationship. Ideally, the changeover from Verizon to Cingular would be smooth, and business would go on as usual. But in reality, there will be substantial costs for changeover, retraining, and discontinued products, not to mention lost revenue. RadioShack's earnings will almost certainly suffer next year.

But if the changeover goes alright, I see a return to solid performance, as: (1) they continue to search for items like Skype, iPod, & Xbox to stock their shelves with, (2) the standard electronics & batteries business remains strong, and (3) their niche is such that competition does not send them the way of the dodo (or turn them into a de facto non-profit).


Financial Highlights:

Shares
Sales EBIT NI CFO EPS O/S ROA*
2005e $5,080M $510M $305M $302M $2.24 134M 23%
2004 4,840 558 337 352 2.12 158 23
2003 4,650 483 298 651 1.80 164 21
2002 4,580 425 263 521 1.50 169 19
2001 4,780 359 166 775 0.89 180 14
2000 4,790 629 368 116 1.89 184 26
1999 4,130 497 297 561 1.47 191 24
1998 4,790 134 61 414 0.30 193 6
1997 5,370 336 186 320 0.86 207 13
1996 6,290 (122) (91) 307 (0.41) 224 (4)
1995 5,840 334 211 673 0.85 238 11
1994 4,940 310 224 268 0.82 264 9
1993 4,100 186 96 322 0.33 287 5
1992 3,650 275 183 146 0.59 300 8
*(EBIT / avg. Assets)


Forecast, Valuation:

Market Cap = $3.2B
Long-term Debt = $500M
Excess cash = $0 (just emptied the account in a Q3 20M share repurchase)
EV = $3.7B
EV/EBIT 6.5x
EV/EBITDA 5.4x
P/E = 10.5
P/Sales = 0.64
FCF = $295M
FCF yield on market cap = 9.2%

When compared to competitors or RSH's own history, this valuation gives a clear message: the market does not expect RadioShack's performance to continue anywhere close to recent years. But I would not count them out so easily.

RSH is not in for explosive growth. I think estimates for next year's EPS (~$1.90) are too high. I wouldn't be surprised to see EPS more like $1.40 due to the changeover, remodelings, and increased SG&A. This will be partially mitigated by new product lines such as MP3 players and Comcast services, although I'm not planning for much help, as new product launches have a history of fizzling.

Even so, after the spring, I think RSH will continue to be able to earn & pay out $300M per year in earnings, and at 6.5 EV/EBITDA it's worth considering.

I expect next year's EPS to be approximately $1.40, after which I expect business to return to normal, with EPS rebounding to $2.45, and growing about 4% as earnings stay essentially flat but buybacks continue to reduce share count. A simple DCF using $2.45 EPS in 2007, payout ratio = 100%, 4% growth, and an 11% required rate, gives a 2005 value of $33 per share.

Catalyst

(1) less uncertainty after what will hopefully be a successful rollover from Verizon to Cingular.
(2) solid performance returning in late 2006
(3) share repurchases.