Why Is Anyone Still Buying This One?

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

RadioShack (NYSE: RSH) has undergone a tremendous fall in over the past year, plummeting to a low of $1.90 per share.  This is a stock that was trading for as much as $24 as recently as 2010.  What happened?  Don’t get me wrong, I think that RadioShack is a business model that won’t work in today’s retail environment.  Also, why have shares rebounded more than 67% since the lows? 

I believe that all of the buying of the past several months is purely speculative.  There is simply no sound fundamental reason to own RadioShack right now.  It can’t be because of valuation.  With negative TTM earning, a P/E ratio is meaningless.  It can’t be for future growth.  When RadioShack reports earnings on Feb. 18, it is expected to report a loss of 65 cents per share for 2012.  Looking forward, the company is projected to lose 42 cents per share in 2013 and 35 cents in 2014.  The losses will narrow a bit; I guess you could call that growth.

The main reason that I would not buy RadioShack right now, even for $1, is because of what it’s up against.  RadioShack cannot match prices with the larger electronics stores like Best Buy (NYSE: BBY).  Basic economics tells us that larger stores can buy more products for cheaper amounts, and they also tend to be able to operate more efficiently.

Even companies like Best Buy have struggled lately.  Best Buy’s problems stem from various issues, such as a misuse of square footage (about 20% of their floor space is still dedicated to CDs and DVDs).  The company has also not been able to price match with internet-based companies, which are the real driving force behind the changing retail landscape, and especially giants like Amazon.com (NASDAQ: AMZN)

Best Buy has pledged to price match anything customers find on Amazon or anywhere else, for that matter.  Can they afford to do this?  Sort of.  Could Radio Shack do this? Absolutely not! 

In full disclosure, out of the three companies mentioned here, Best Buy is the only one I would recommend right now.  I have written about the company before, but to make a long story short, it trades at an excellent valuation (just 6.6 times forward earnings) due to analyst pessimism, they are taking all of the right steps, and there is a very real possibility that Best Buy’s founder will succeed in his quest to take the company private, for a premium.

Amazon, on the other hand, is a fantastic company, but their stock is outrageously expensive, and for no good reason.  I know that last sentence will spark controversy from the Amazon faithful, so in self-defense, I ask you to read my Amazon post from a few weeks ago by following this link.

Back to Radio Shack: This company has declining revenues, declining margins, declining assets, and increasing debt.  Radio Shack has said that it intends to stop the bleeding by “increasing the customer experiences in its stores.” This is an admirable goal, but it still won’t be enough, in my opinion.  I only wonder how much market share and margin declines Radio Shack is able to absorb.  The company reports 2012’s earnings on Feb. 18, so hopefully they’ll have some solutions to their growing problems.

KWMatt82 has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com and RadioShack. The Motley Fool is short RadioShack. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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