Is RadioShack a Buy Post-Earnings?

With shares of RadioShack (NYSE:RSH) trading around $2, is RSH an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

RadioShack engages in the retail sale of consumer electronics goods and services through its store chain. The company operates in two segments, U.S. RadioShack company-operated stores and Target Mobile centers. It offers postpaid and prepaid wireless handsets, tablet devices, home entertainment, wireless, computer, and music accessories, as well as general purpose and special purpose power products. RadioShacks all supplies laptop computers, personal computing products, digital music players, residential telephones, global positioning system devices, cameras, digital televisions, and other consumer electronics products.

RadioShack reported earnings results for the third quarter ended September 30, 2013, including total net sales and operating revenues of $805 million and net loss of $112 million. Joseph C. Magnacca, chief executive officer, said, “We are moving forward quickly and as planned with our turnaround efforts. As we have said, we expect our work to take several quarters and during that time our results will vary quarter to quarter as we make strategic changes to improve our long-term financial performance. This quarter reflects our strategic decision to accelerate the improvements to the product assortment in our stores by removing duplicate and unproductive inventory. The lower inventory valuations for these products and projected disposal costs resulted in an expected increase to our cost of products sold this quarter.”

T = Technicals on the Stock Chart Are Mixed

RadioShack stock has not done very well in recent years. The stock has seen lower highs and lower lows and looks poised to continue this path. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, RadioShack is trading below its key averages, which signal neutral price action in the near-term.

RSH

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Radioshack options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Radioshack Options

105.13%

63%

61%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

November Options

Steep

Average

December Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on RadioShack’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for RadioShack look like and more importantly, how did the markets like these numbers?

2013 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

-136.17%

-152.38%

-437.50%

-634.57%

Revenue Growth (Y-O-Y)

-10.31%

-0.48%

-7.04%

-6.47%

Earnings Reaction

-20.46%*

-5.11%

0.95%

0.32%

RadioShack has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been disappointed with RadioShack’s recent earnings announcements.

* As of this writing

P = Excellent Relative Performance Versus Peers and Sector

How has RadioShack stock done relative to its peers, Best Buy (NYSE:BBY), Wal-Mart (NYSE:WMT), Aaron’s (NYSE:AAN), and sector?

RadioShack

Best Buy

Wal-Mart

Aaron’s

Sector

Year-to-Date Return

32.08%

264.50%

11.75%

1.77%

15.19%

RadioShack has been a relative performance leader, year-to-date.

Conclusion

RadioShack offers a variety of consumer electronics and services to a growing population. A recent earnings release has investors sour about the company. The stock has declined in recent years and is currently trading near the lower-end of its yearly range. Over the last four quarters, earnings and revenues have been decreasing which has left investors disappointed with the company. Relative to its peers and sector, RadioShack has been a year-to-date performance leader. WAIT AND SEE what RadioShack does this quarter.

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