A Rare Value Opportunity

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Ben Graham, widely regarded as the father of value investing and the mentor of Warren Buffett, lived during a time when companies routinely sold for less than their net current asset value. Companies fitting this description are far more rare today, but one stock that has engaged in a nosedive over the past couple of years qualifies: RadioShack (NYSE: RSH)

A Company In Decline
Many people forgot that RadioShack existed. And yet, its stores are everywhere. At the end of September, RadioShack operated a total of 7,205 retail locations. Previously a seller of general consumer electronics, RadioShack has transformed itself over the past few years into a distribution point for mobile devices and wireless plans.

RadioShack competes with much larger electronics retailer Best Buy (NYSE: BBY), which recorded revenues of $50 billion over the past 12 months compared tojust $4.3 billion for RadioShack. Best Buy has been focusing on building more small-format Best Buy Mobile stores, which sell mobile devices and wireless plans -- exactly the same model as RadioShack.

Many brick-and-mortar retailers have been struggling, including Best Buy and RadioShack, partially due to the "showrooming effect". Customers increasingly browse a retail store, only to then buy the product online for a lower price. This is especially prevalent with products such as LCD TV's and laptops. Amazon (NASDAQ: AMZN) typically benefits most from this, since it can undercut RadioShack and Best Buy on price and offer free shipping through its Amazon Prime service.

RadioShack stock has tumbled to just $2.23 per share as of this writing, after trading over $20 per share in 2010. Best Buy stock has also spiraled downward, while Amazon stock is up 200% from five years ago.

<img src="http://media.ycharts.com/charts/aa0bc6eb5d1b7de2c95f0c9388a1cfc6.png" />

RSH data by YCharts

RadioShack's current market capitalization sits at $222 million, which is just 5% of total annual sales. But this epic decline in market capitalization has created an interesting situation.


A net-net is a company which trades for less than its current assets minus total liabilities, or net current assets. This doesn't happen very often these days, but when it does, it's definitely worth taking a look. Tangible book value, a similar metric, is the total tangible assets minus total liabilities. Tangible book value excludes things like goodwill, but includes long-term assets like property and equipment. In the event of a liquidation, it's likely that these long-term assets will be discounted well below their book value. Both of these values can be calculated from the most recent balance sheet. The relevant numbers are displayed in the table below.

<table> <tbody> <tr> <td>Cash</td> <td>$546</td> </tr> <tr> <td>Receivables</td> <td>$349</td> </tr> <tr> <td>Inventory</td> <td>$851</td> </tr> <tr> <td>Other Current Assets</td> <td>$174</td> </tr> <tr> <td><strong>Total Current Assets</strong></td> <td><strong>$1,920</strong></td> </tr> <tr> <td>Long-term Assets</td> <td>$241</td> </tr> <tr> <td>Short-term Debt</td> <td>$275</td> </tr> <tr> <td>Long-term Debt</td> <td>$474</td> </tr> <tr> <td>Other Liabilities</td> <td>$826</td> </tr> <tr> <td><strong>Total Liabilities</strong></td> <td><strong>$1,575</strong></td> </tr> <tr> <td><em>Tangible Book Value</em></td> <td><em>$586</em></td> </tr> <tr> <td><em>Net Current Assets</em></td> <td><em>$345</em></td> </tr> </tbody> </table>

* Values in millions

Taking these numbers as-is, we see that the tangible book value is $586 million while the net current asset value is $345 million. So RadioShack trades at a 62% discount to tangible book value and a 35% discount to net current assets. If RadioShack were to declare bankruptcy today and liquidate, it is likely that the net sale of all assets less liabilities would be greater than $222 million. Some uncertainty is introduced because long-term assets and inventory may have a liquidation value less than their stated book value, but given the discount above, there is ample margin of safety here.

The Downside

The problem with this is that RadioShack is losing money. In 2011, the company had a free cash flow of $136 million, but that number has fallen of a cliff in 2012. In the first 9 months of 2012, free cash flow sits at -$12 million.

This isn't a huge number, and RadioShack has a large cash balance to absorb some losses. But as debt comes due, this ability is greatly diminished. Of note is a revolving credit facility to which RadioShack has access, totaling $393.8 million as of the end of Q3. In terms of liquidity, the company should be fine for at least a few years.

The Bottom Line

With RadioShack selling at such a large discount to both current asset value and tangible book value, the bar is set extremely low. The company doesn't need to match the profits of the past. It simply needs to stop losing money. If that happens within the next few years, $2.23 per share will look like a steal in retrospect.

TheBargainBin owns shares of Best Buy. The Motley Fool owns shares of Amazon.com and RadioShack and is short RadioShack. Motley Fool newsletter services recommend Amazon.com. 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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