RadioShack takes investors on roller coaster ride
Is the electronics retailer a dinosaur, a turnaround tale or priced for bankruptcy?
It's been quite a roller coaster ride the past several days for RadioShack (RSH), which continues attempts to turn around a stale business in the extremely difficult consumer electronics retail space.
At this point, it appears as though the name is trading more like an option than a stock. The option, in this case, representing whether the company can turn itself around and ultimately survive.
The extreme volatility was on display last week amid reports that the company intended to hire an adviser to help it navigate some rough waters associated with a looming debt maturity and other balance sheet related issues. The fear that this really meant bankruptcy was on the horizon helped send shares as low as $2.18 Thursday, a 23% drop from the previous close, on nine times normal average volume. By the end of trading, shares recovered most of the drop, closing at $2.63.
Late in the day, the company attempted to quell the bankruptcy fears acknowledging that it was in discussions with investment banks, but stating that these talks were focused on further strengthening the balance sheet and its current $820 million in liquidity, and not on bankruptcy. On Friday, shares gained back 11%, after digesting the company's statement. Then Monday, the stock added another 8.5% -- the roller coaster ride continues, and the volatility is likely to continue.
In my view, there are three camps in the RadioShack debate. The first sees the company as a dinosaur; one that has become largely irrelevant in the intensely competitive consumer electronics business. Much like the dinosaur, the company will become extinct, and is simply grasping at straws at this point, delaying the inevitable. The brand is well past its prime, and has no hope.
The second camp sees the potential for a rebirth under the direction of CEO Joe Magnacca, who successfully turned around the Duane Reade drugstore chain. Through a successful redesign of the stores, and a re-branding of the company's image, the customers will come back. I would count the number in this group as much smaller than the first.
I am squarely in the third camp, which believes that the market has prematurely priced the company for bankruptcy. I'm not sure yet whether RadioShack will survive in the long-term, but I don't believe that it is as close to bankruptcy as the market does. There is time for a turnaround, and if the company can regain any relevance, if the store redesign has any success at bringing back the customers, then the stock should react favorably; but, one step at a time. To expect Joe Magnacca to waltz into the CEO role in February, and turn the company around in six months or a year is to expect a miracle.
For me, this is about a well-known (albeit struggling) brand name, that is currently trading at just 1.2 times net current asset value; it's about an asset of which very little is expected, and it shows in the price.
One thing is clear, however, there is a lot of risk having capital tied up in this name and you can expect the volatility, the option-like price swings, to continue.
At the time of publication the author held no positions in any of the stocks mentioned.
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