Betting on RadioShack

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

There are certainly values to be had in retail, many of which I've already discussed (Wal-Mart and Target to name a couple). The recent pressures from Europe and rising gas prices have put even more pressure on an already oversold sector - good news for the mid to long-term value investor ready, willing and able to wait it out.

As if there weren’t enough obstacles to overcome, retailers focused on electronics have really taken a hit. Even the big boys like Wal-Mart and Target – though overall sales have been good – are dealing with significant hits on electronic sales. Until consumers are 100% on board with an economic recovery – and there are a few positive indicators – electronics will continue to feel the pressure.

Though not the biggest, RadioShack (NYSE: RSH) is certainly the oldest. Once a mainstay in towns across America, RadioShack is no longer the key player on the electronics block. Beleaguered $8.5 billion Best Buy (NYSE: BBY) – much of which is unwarranted, but that’s for another time – heads the list of electronics retailers followed by $2.4 billion Aaron’s (NYSE: AAN). Other than size, there are a couple differences that make RadioShack an appealing alternative.

With the kind of performance RadioShack shareholders have lived through – the stock is trading at less than half its price vs. this time last year – there are issues that need to be addressed. As Fool writer Seth Jayson correctly points out non recurring cash flow items are a concern. And expenses were anything but pretty in Q4 – an area management knows must be addressed.

Announcing the decision to rescind the stock buyback initiative certainly didn’t please shareholders either. With so much going wrong, what in the world would an investor see in RadioShack? A few things actually.

Three straight years of revenue growth is certainly a step in the right direction, a trait shared by Best Buy and Aaron’s. Of course when expenses get out of line – as they have for RadioShack– the increase in revenue doesn’t equate to earnings growth. But there’s no doubt that RadioShack is on firm financial footing too. It’s not often you come across a company with a market cap of about $683 million and cash of nearly $592 million. True the $670 million in debt takes some of the luster off of the cash pile, but that’s part of the reason the company is trading so cheaply - at just over 10 times earnings. That’s a tad more expensive than Best Buy’s 8.46 P/E but considerably less than Aaron’s 18+.

What all this leaves us with is a firm that’s been beaten down - and rightfully so – but isn’t on the precipice. That’s important because for yield hungry investors RadioShack may be right up your alley. At 7.3%, RadioShack’s dividend is the highest around – this compares to 2.6% for Best Buy and a 0.23% yield for Aaron’s - and management has reiterated their intention to keep it coming. Add that to a share price at or near resistance levels and the stock starts looking even better.

The investment opinions included are just that, opinions. Investing involves risk, as you well know, so consider your decisions wisely. Tim holds no position in the securities mentioned in this article.

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