Dell-RadioShack Merger? I'm Not Holding My Breath

I get a kick out of some of the ridiculous deals that are rumored on the Street. Did anyone really think Sears Holdings (SHLD) would buy Anheuser Busch (BUD)?

The latest story comes to us from BusinessWeek, speculating that Dell (DELL) could buy RadioShack (RSH) in an attempt to reinvigorate its business after Hewlett Packard (HPQ) has kicked its butt for a while now.

How does this rumor get published? There is no evidence whatsoever that Dell would even consider buying an electronics retailer. Did RadioShack shares really jump 6% Monday on this story? It's insane. Remember the Gateway Country store concept? Huge bust. That was nearly as bad as waltzing into large corporations trying to sell computers in cow boxes.

The current market environment is very conducive to spreading M&A rumors. After all, the sheer volume of deals right now is astounding. That said, don't put stock into the stories that don't really make any sense. If you are looking to sell some stock, use these temporary bumps to sell into the rumors if you don't think they have merit. A client of mine did that with BUD when merger rumors surfaced, and it proved to be the top in the stock.

I didn't sell any RSH Monday into the rally, but that is because I like the stock for other reasons, not based on a silly buyout rumor. If anyone was going to buy RSH, you'd think it would be Sears, not Dell.

Disclosure: Author is long shares of RadioShack and Sears Holdings at time of writing.

Comments

[CrossProfit]

We don't think that RadioShack (RSH) has enough real estate to be of interest to Sears Holdings (SHLD).

You could throw into the mix one of the latest rumors - Wendy's (WEN). Not to mention the Microsoft/Yahoo pump. It seems that for every one mega merger, ten rumors are started for dubious reasons. This will propel mega cap stocks upwards, at least for the short term.

As stated in a previous article, check the alleged pricing of the rumor. If it is not feasible, then we agree that you should sell into the excitement.

The recent RSH price movement has more to do with Q1 earnings beating consensus by a whopping 100%. If RSH can do it again in Q2, then by all means buy now. If RSH misses current estimates ($0.24) in Q2, then this stock could drop like a rock. There is no clear picture regarding sustained earnings. RSH seems to fluctuate from quarter to quarter without any real warning signs.

Most of the price action was from $17 in the beginning of the year, to $28 in mid April. The climb was pretty much spread out equally over the 100 day period, yet analysts raised EPS targets after the company reported.

We would suggest considering taking half of the table at $33. As Saul says; "never regret a profit".

Disclosure: Opinion of CrossProfit analysts and may not be the opinion of CrossProfit.com. There are no conflicts.

[bob123by]

SEARS SHLD IS SURE TO BUY SOMETHING, DON'T YOU THINK?

[bob123by]

HOW ABOUT SHLD GET TOGETHER WITH DELL OR HPQ HEWLET AND COMPETE AGAINST BEST BUY AND CIRCUIT CITY

[MikeTrilivas]

You shoudn't be holding your stock either. Not at this price. Radio Shack has a LOT of high expectation baked in and frankly it does not deserve to trade at this price. Looking at their latest 10Q it appears to me that they are beating the bottom line due to the restructuring and there's so much you can cut before it catches up with you and it will. Net sales and Op revenue is down -14.5%. Comparable store sales down -9.2%. Profit margin down. Gross margin up primarily because of the excise tax refund.

Between March 1 thru March 31st they started buying back stock, $45mil worth woth an avg. price of $25 and change.

These guys have been laying off store managers, replacing them with less seasoned lower paid folks.

very frothy stock with a tremendously high trailing PE, very high forward PE and PEG. There is NO growth in Radio shack to justify the current price. This stock should be trading 20% lower from here.

[Chad Brand]

That's the same exact argument that was made with SHLD. RSH is strictly a margin story. I agree the stock is extended after a jump from 18 to 32 almost overnight. However, as was the case with SHLD, metrics like same store sales are irrelevant. Stocks are all about earnings and estimates are still too low.

[MikeTrilivas]

Sorry Chad, but you can't compare Sears Holdings with Radio Shack. Radio Shack has completely lost its relevance in the market and i has lost it because of Best Buy, Circuit City, Fry's Electronics, CompUSA. Way too much competition in this space. You can shave off the excess, buy back the stock and boost earnings but at the end of the day this catches up with you... And it will catch up with RSH big time.

I have a Radio Shack about 1/2 mile from my house. Everytime i go there to get something, it seems as if i'm the only person there.

This stock trades at 38 TPE and 18FPE versus its peers which by the way are better companies and the worst thing of all is that their earnings are manufactured and people are cheering.

Hey I have an idea. Maybe Julian Day can close a coulple of hundred stores each quarters, buy back some more stock, layoff some more managers and employees and boost the earnings...and if the stock stays above $30 for another couple of weeks some of his options get to vest...

Now, that's what I call "Drive-by Re-engineering"

Good luck

[Chad Brand]

How is that not exactly like Sears Holdings? Isn't Kmart exactly the same as RadioShack as far as a retailer that has lost its relevance and been beaten by most of its competitors? It's a perfect comparison.

I'm not saying RSH is a great buy for the next 5 years, but earnings are what drive stock price. Once Day maximizes the earnings power (in this case, margins from a stagnant revenue base) then the investment thesis is over. My point is that we're not there yet. He can get EPS well north of $2.00, which will push the stock higher.

There is nothing that can "catch up with you." All that will happen is one day he'll wake up and realize that nothing else can be done because BBY is getting all the business and he can't squeeze anymore juice out of the orange. The upside will be gone, but the stock won't tank unless some horrible management team runs it into the ground again.

It's EXACTLY the same thing as SHLD. Where do you think Day is getting these ideas from? Perhaps from when he helped Lampert lead Kmart out of bankruptcy and into the black? Nobody ever was seen in a Kmart either, but he managed to build up enough cash from it to buy Sears!

[MikeTrilivas]

Chad,

I have been holding Sears since 1991. In fact I inhereted the stock from my grandfather who had held it, I don't even know since when. Sears was/is a very diverse business and frankly so was Kmart. RadioShack isn't. This is a completely different ballgame and challenge for Julian Day.

At the end of day the lifeblood of the retail business is sales and sooner rather than later Radioshack will have to deliver the goods. I can understand the cost cutting measures, layoffs, store closings etc but when it comes down to they'll have to show top line revenue and growth.

This is a marathon for the current management but the stock had behaved as if it's involved in the 100 meter dash...Radioshack is not a turnaround story until top line revenue reverses the current trend and that's not going to happen any time soon. At least not this year.

RadoShalck's stock should not be trading at this levels and is extremely inflated based on hope, Julian Day's respect track record, manipulation, rumors, inuendo and short covering. In short, this is held together by gum and duct tape. The slightest mistep and this thing will drop like a rock.

[Chad Brand]

Even though RSH is a much more focused retailer than Sears and Kmart as far as product lines go, I still think the common thread is a brand that has been losing customers, not gaining them, for years. I agree that at some point Day will have to grow the business, just like Lampert will have to do with Sears.

However, I think investors underestimated how much juice could be squeezed from Sears/Kmart, hence the stock's move from 15 to 175. There is still a lot of room for SHLD, and the same goes for RSH. Once they reach peak margins I will likely sell RSH because I do not believe Day can bring many more customers in the doors. That said, he could easily get RSH's EPS to $2.50 just with the current sales base of $4B. If that happens, the stock is $35 or $40. At that point, I'd be a seller.

I think we just disagree how high it can go before it reaches its potential. The same goes for SHLD... they won't be able to boost sales that much, even with the new marketing plans underway, but margins still have a way to go, which will propel the stock higher. Neither stock is a sell... yet anyway.

As far as a misstep causing it to drop like a rock, I just don't see what can go wrong. They have very few customers as it is. If you still shop at RSH today, you're not going to change your mind and go elsewhere as they try to improve the buying experience. The business is at rock bottom from a sales perspective, so how could it get any worse as long as they keep costs in line and don't blow cap ex on low return projects? I guess they could drive people away as they make changes if they make poor decisions, but that seems unlikely.

[MikeTrilivas]

Looks like those Texas boys are beggining to make some noise around RadioShack...

www.star-telegram.com/...