Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Investors Need to Run From this Value Trap

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

There are value stocks, and then there are stocks that simply act like value stocks. Take RadioShack (NYSE: RSH  ) , for instance. The company is down 78% from its 52-week high, it's a household brand that everyone knows, and it has all sorts of assets that could be liquidated in a fire sale. That's the start of a great value play. But, as yesterday's earnings release highlighted, RadioShack isn't a value stock; it's a death trap.

Bad news stacked on bad news
The beginning of the fall is always in same-store sales. RadioShack had a 1.6% drop in comparable sales last quarter. Management said that one of the biggest problems for the stores was the delayed purchasing of the new iPhone. Last year, the iPhone came in at Q4, which meant that people who needed to upgrade in the middle of the year probably went ahead and did it. This year, the iPhone 5 came out in September, so mid-year upgraders may have held off. Either way, sales were disappointing.

The company is also losing money on its Target (NYSE: TGT  ) arrangement. Under that plan, RadioShack manages the postpaid mobile sales in 1,500 Target locations. That means that RadioShack is selling low margin phones and missing out on accessory sales, one of its best categories. On its conference call, RadioShack said that it was trying to work out a new deal with Target, but that right now, it was planning on breaking off the deal in April of next year.

Finally, the combination of lower sales, shrinking margins, and poor relationships with Target resulted in a $0.47 loss per share. That's a huge decline from last year's break-even result, and EPS fell well short of the $0.16 that analysts had been expecting.

The market reaction was odd, to say the least. With an earnings miss, a failed plan in place, and no CEO at the helm, early trading slapped RadioShack on the hand, and shares fell 14% in early trading. Then -- and this is conjecture -- word got out that now RadioShack was an even better value play, and the shares rebounded by midday. I can think of no other explanation for the company surviving a horrible earnings report on a bad day for the market.

The rumor of value
Looking back, over the past week, RadioShack has outperformed the S&P 500 by almost 7%. A lot of that stability came from one line in the conference call. Interim CEO Dorvin Lively said, "We have total liquidity of $938 million, including the $546 million of unrestricted cash." That's a strong position, and the company looks like a great value play on paper.

Current assets are sitting at $1.9 billion, while total liabilities are only at $1.6 billion. Just using that rough math, the company is worth about $345 million, but its only valued at $250 million on the stock market. It's easy to see why investors could be excited about RadioShack, just looking at the headliner numbers. But as Fitch Ratings has alluded to, the company is still in cash burning mode. The turnaround may be just ahead but, if it's not, then the company is just going to hemorrhage cash.

RadioShack is also facing the growing specter of irrelevancy. As companies like Amazon (Nasdaq: AMZN  ) and Best Buy (NYSE: BBY  ) diversify offerings, RadioShack's niche is disappearing. I can't remember the last time I talked to a person who raved about the selection and prices at RadioShack. Until the company gets some traction with customers, there's no reason to expect a turnaround.

The bottom line
There is one option that I haven't discussed yet, and it's more likely than some grand RadioShack renaissance – it's a buyout. RadioShack has a good(ish) brand, good locations, and a lot of potential. All of those combine to make for a nice private equity buyout target. I wouldn't be surprised if RadioShack went on the auction block and promptly sold out over the next year. That could be a great return for investors, if it happens soon enough. If, however, the company languishes over a few quarters, and spends the cash they have on hand, I can't imagine the buyout price would be at all rewarding.

To get your hands on some real value, check out the Motely Fool's report on The Stocks Only the Smartest Investors Are Buying. These aren't the stocks you find dumpster diving, these are pedigree stocks that Wall Street has overlooked due to their smaller size. You can get all the details for free in this report just for Fool readers. Click here to get your copy today.

Read/Post Comments (0) | Recommend This Article (2)

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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2078055, ~/Articles/ArticleHandler.aspx, 10/24/2016 9:29:39 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 13 minutes ago Sponsored by:
DOW 18,223.03 77.32 0.43%
S&P 500 2,151.33 10.17 0.47%
NASD 5,309.83 52.43 1.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
RSHCQ $0.00 Down +0.00 +0.00%
RadioShack CAPS Rating: *
AMZN $838.09 Up +19.10 +2.33% CAPS Rating: ****
BBY $39.46 Down +0.00 +0.00%
Best Buy CAPS Rating: *
TGT $68.26 Up +0.03 +0.04%
Target CAPS Rating: ***