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RadioShack's (NYSE: RSH  ) latest quarter reveals a company in grave danger of a nasty derailment. Investors, switch tracks and steer clear of this retail wreck.

Emergency on the horizon?
RadioShack did manage to increase its third-quarter net income 23% to $46 million, or $0.37 per share. Revenue increased 6.2% to $1.05 billion, and same-store sales also increased by 6.2%.

Granted, these sound like impressive figures for a company facing numerous retail rivals. RadioShack must contend with Best Buy (NYSE: BBY  ) and Conn's (Nasdaq: CONN  ) , as well as gadget-friendly discounters such as Wal-Mart (NYSE: WMT  ) , Target (NYSE: TGT  ) and Costco (Nasdaq: COST  ) .

However, investors need to remember that RadioShack's third-quarter results were bolstered by the mobile phone market, a fairly cyclical business. Read RadioShack's press release, and you'll notice that the only stand-out category in its table of sales drivers is the wireless category, up 25.8%.

Smartphones like Apple's (Nasdaq: AAPL  ) iPhone are hot, which helped float RadioShack's boat during the quarter. However, when the cycle dries up, and rivals like Best Buy start turning up the competitive heat in the smartphone arena, RadioShack could have little to fall back on. Sales of digital televisions, netbooks, digital music players, video game hardware, and digital cameras sales all dipped into negative territory at RadioShack during the quarter.

This same concern flares up periodically for RadioShack. Here's how tough things can get when the phone cycle goes on the downswing, as it did in 2005, and RadioShack's fallback plan of peddling batteries, antennas, and other electronics gadgetry just isn't enough to make up for tapped-out consumers who've already upgraded their mobiles. Some Fools even saw this previous plunge coming.

Danger: Speeding train
Even more foreboding for investors, RadioShack's stock has been on a tear this year, rising about 46% despite its lack of retail strength. A lot of its positive momentum owed to weird summertime rumors that it could be a takeover candidate. But we Fools couldn't imagine who on earth would consider shacking up with The Shack, and thus far, those rumors have unsurprisingly failed to pan out.

This leaves RadioShack investors with a pricey stock with a PEG ratio of 1.64. That might not sound horribly overpriced -- until you realize that this company might currently be on a temporary sales kick, with tough times ahead and formidable rivals just waiting to eat its lunch.

Best Buy seems like a far more stable stock, and a more defensive investment; better yet, its brand doesn't bring to mind the Commodore 64 and Pong. I'd argue that Best Buy's even cheap right now, with a PEG ratio of just 1.01.

Unfortunately, plenty of retailers are on the wrong track these days, flirting with potential train wreck status. If you want to track The Shack, why not add it to our My Watchlist function? In addition, sound off in the comment boxes below about whether RadioShack is about to crash and burn. Given today's plunging stock price, that process may have already begun.

Best Buy, Costco, and Wal-Mart are Motley Fool Inside Value recommendations. Apple, Best Buy, and Costco are Motley Fool Stock Advisor choices. Motley Fool Options has recommended buying calls on Best Buy. The Fool owns shares of Apple, Best Buy, Costco, and Wal-Mart. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 25, 2010, at 4:35 PM, BenFE wrote:

    Company is cash heavy bottom line, but employees are treated like trash. Bottom line comes primarily from cuts to salaries and cutting loose higher paid older personnel. A REAL indepth look at really where the profits are coming from will reveal the true condition of the company.

  • Report this Comment On October 25, 2010, at 5:52 PM, neamakri wrote:

    I want to share with Fools. I worked at Radio Shack HQ twenty years ago. Their management model is about 50 years behind; Scrooge would be right at home there today.

    From what I see, they have no idea how to reinvent themselves for the 21st century. The only thing keeping them solvent is cell-phone residuals.

    Do not buy this stock !

  • Report this Comment On October 26, 2010, at 10:12 AM, BMFPitt wrote:

    I don't understand how they're still in business.

  • Report this Comment On October 28, 2010, at 4:32 AM, CascadeHead wrote:

    Even CEO Can't Figure Out How RadioShack Still In Business

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