The BMW Method
RSH - Investment Thesis

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By Bakuvdanet
April 21, 2006

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Ok, Denny, you asked for it, you got it.

Actually been working on this RSH info off and on, mostly off, since February. Just picked it up again last week. It's slightly more developed than past efforts on SYY and CAG, but not much, so feel free to add, critique, etc. I'm still trying to understand the impact of debt on a company, if anyone has a few pointers on how you like to look at debt, measure debt, analyze debt, it'd be helpful. What metrics do you use?

Hopefully, it's not too repetitive, at some point the format will change, but earnings come out tomorrow morning and I don't have time to rework it.

Happy reading,

RadioShack (RSH) Investment Thesis

Company Name: RadioShack
Ticker: RSH

April 20, 2006
Current Price: $18.04
Dividend Yield: 1.30%
Buy-Around Price: $xx.xx
Bought Price: $xx.xx (10% drop -> $16.24)
month day, year

Big Picture / General Observations
Third largest consumer electronics seller in the United States. Recently switched to selling Cingular cell phone service from Verizon. Took longer than expected. Closing under performing stores. Increasing store size. Recent resignation of CEO.

When comparing the pros, cons and looking for a catalyst, it seems the primary catalysts are continued emphasis on phone kiosks, adding high demand, low profit margin products to drive traffic to the stores so can see higher margin products, increase store size to enable the display of more products (the more people see, the more they'll buy), and ramp-up of phone and phone accessories sales of Cingular products (switched from Verizon).

This appears to have potential to be a decent investment with long-term value. Short term, i.e. - less than one year, RSH will probably not move too much from current level unless improvements and store closings bring positive results sooner than expected.

Earnings valuation model price RadioShack with a trading range between about 16 and 27 per share. Don't expect it to hit 27 soon, i.e. - this year.

Seems attractive if looking for a maximum 20% gain sometime within a year, but a chance that won't happen, especially if catalysts don't improve the business as quickly as expected. A possible double in 3 years, if they can execute their turnaround strategy.

Can it get worse at RadioShack? Maybe, but I think the chances are higher that we're close to the bottom. Expectations are fairly low at this point. Wait until earnings are released the morning of Friday April 21, 2006 to see if there are any surprises. Have a good feeling that we'll see a turnaround, especially as(if?) revenues from Cingular services and products ramps up. May take a couple years.

Financial Snapshot
Earnings peaked in 2004, dropped in 2005 and will drop again in 2006. Earnings growth from 2001 to 2005 is 15.9%. EPS growth from 2001 to estimated 2006 is 12%.

Dividends increased 13.6% in 2003. Stayed the same since. Payout ratio was 14% for 2005, similar (17%) for 2006 based on earnings estimates.

Debt was around $500m at the end of 2005 and has come slowly down from $565m in 2001. Debt to equity ratio is .9 (Yahoo). Debt to free cash flow is roughly 3 to 1 (i.e. - would take 3 years to pay off debt with free cash flow). Has the cash flow to pay down debt. Repurchased $580m in shares in 2005, so chose to buy back shares rather than pay off debt. This has held true for the past 4 years, where RSH has emphasized buying back shares more than paying down debt.

EPS Growth 2001 to 2005: 15.9%
Dividend Growth 2001 to 2005: 2.59%

Ave CAGR Price: $43.32
Earnings Valuation Trading Range: $15.75 to $26.96
Dividend Valuation Trading Range: $20.94 to $35.71
Graham Intrinsic Value: $37.29
DCF: $30, current price represents a 30% discount
S&P Fair Value: $21.00, as of 4/8/2006, today's price is a 14% discount.

BMW Method Metrics
Today / At time of purchase:
16-year chart
Ave CAGR = 12.0%
Current CAGR = 6.2%
RMS = -2.13, RF = 2.34

Potential Sell Prices at Ave CAGR of 12.0%, based on mklein charts:
Ave CAGR Price   +1 RMS Price
April 2006      $43.01          $63.99
April 2007      $49.19          $76.37
April 2008      $55.14          $85.61
April 2009      $61.81          $95.97

Hand-drawn charts, I like this set better, seems more realistic:
15-year chart
Ave CAGR: 8.95%
Low CAGR: 6.62%
Current CAGR: 5.58%

Potential Sell Prices at Ave CAGR of 8.95%, based on hand-drawn charts:
Ave CAGR Price   +1 RMS Price
April 2006      $27.79          $32.59
April 2007      $30.28          $35.51
April 2008      $32.99          $38.68
April 2009      $35.94          $42.15

Investment Expectations/Timeframe
$21/share -> 16% within a year. Longer than a year -> ???

Is the Dividend Safe?
Yes. Plenty of cash flow for dividend.

The Company / Business
RadioShack is the nation's 5th largest electronics retailer. Sells cell phones, electronics accessories (connectors, speaker wires), computer accessories, radio-controlled cars, some home theater gear, small TVs. Has 7,000 stores nationwide and roughly 700 phone kiosks plus another 100 stores in Mexico.

Reason(s) for Recent Share Price Decline
Switchover from Verizon Wireless to Cingular distributor took longer than expected and left Radio Shack with more inventory than usual. Failed to recognize importance of personal electronics (mp3 players, etc.) in bringing customers to the stores. Less traffic equals less eyeballs on higher margin products, especially phone accessories.

Closing under performing stores, more phone kiosks, more lower-margin, higher-traffic generating products in stores, increase square footage of stores to display more product.

Possible return to the mean within a couple years. Profitable, good cash flow, enough cash to pay dividend.

May stay relatively flat during 2006 while restructuring occurs. Possible over dependence on wireless business for growth. The CEO situation is unsettled. Interim CEO has good reputation, but may not be given the position outright. Difficulty with the transition to Cingular, a new fixed compensation structure for store workers, and the potential for liquidations, which may be more aggressive than originally anticipated (Forbes article).

Things to Watch
Effect of closing poor performing stores, success of transition to Cingular, stocking high demand, low margin products. Succession of CEO.

Most Important Buy Factor(s)
All the bad news is priced in, probably won't get much lower. Increasing ramp-up of Cingular products.

Important Dates
Earnings Dates:
Feb 17 (4Q, annual results), April 21 2006 (1Q), July (2Q), Oct (3Q)

Dividend Dates:

Payment Date      Record Date      Announce Date
12/19/2005      12/01/2005      10/03/2005

Beginning in 2002, dividends are paid once a year, in December, rather than quarterly.

What Others Say

Additional Analysis

Background info, pros/cons/risks: S&P Report, analysis dated Apr 08, 2006.
Motley Fool article on January 12, 2006, titled, "RadioShack Losing Power"

Forbes article on April 18, 2006

16-year CAGR: mklein site
EPS, dividend, yearly price ranges for valuation: S&P report for RSH

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