Is RadioShack Destined for Greatness?

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Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what RadioShack's (NYS: RSH) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell RadioShack's story, and we'll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always be reported at a steady rate, we'll also look at how much RadioShack's free cash flow has grown in comparison to its net income.


A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If RadioShack's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is RadioShack managing its resources well? A company's return on equity should be improving, and its debt to equity ratio declining, if it's to earn our approval.

Healthy dividends are always welcome, so we'll also make sure that RadioShack's dividend payouts are increasing, but at a level that can be sustained by its free cash flow.

By the numbers
Now, let's take a look at RadioShack's key statistics:

RSH Total Return Price Chart

RSH Total Return Price data by YCharts.

Passing Criteria

3-Year Change*

Grade

Revenue Growth > 30%

3.1%

Fail

Improving Profit Margin

(143.6%)

Fail

Free Cash Flow Growth > Net Income Growth

(63.1%) vs. (108.4%)

Pass

Improving Earnings per Share

(110.1%)

Fail

Stock Growth (+ 15%) < EPS Growth

(81%) vs. (110.1%)

Fail

Source: YCharts. *Period begins at end of Q2 2009.

RSH Return on Equity Chart

RSH Return on Equity data by YCharts.

Passing Criteria

3-Year Change*

Grade

Improving Return on Equity

(109.7%)

Fail

Declining Debt to Equity

28.8%

Fail

Dividend Growth > 25%

(50%)

Fail

Free Cash Flow Payout Ratio < 50%

35.1%

Pass

Source: YCharts. *Period begins at end of Q2 2009.

How we got here and where we're going
RadioShack certainly does not appear destined for greatness after earning only two out of nine possible passing grades, with one of those passing grades only awarded because the company's kept its free cash flow from collapsing as quickly as its net income. Although RadioShack's currently available numbers present it as a high-yielding dividend stock, the company suspended dividend payments when CEO Jim Gooch stepped down.

Speaking of Gooch, his disastrous tenure completely failed to stem the tide of consumer movement toward buying electronic goods online. His major turnaround initiative, refocusing RadioShack on the tablet and smartphone market, has done nothing to reverse dwindling margins and rising debt as consumers find it more rewarding to simply go to an Apple (NAS: AAPL)  Store if they want an iPhone or iPad. Promoting Apple products may very well contribute to those dwindling margins, and a partnership with Target (NYS: TGT) only improved mobile sales by 3.3% in RadioShack's latest quarter. Most other products saw double-digit sales declines, more than offsetting any small mobile gain.

RadioShack's fighting a losing battle against Amazon.com (NAS: AMZN) , which also offers smartphones on top of a far, far larger product database than one finds in RadioShack stores. The same problem plagues Best Buy (NYS: BBY) , which essentially adopted the same "smaller mobile-oriented stores" strategy that's done so well (sarcasm alert) for RadioShack. The problem with such a strategy is that mobile retailing is far from unique, and it's difficult to see compelling reasons that a consumer would visit a mobile reseller rather than visiting a carrier's store or simply ordering a phone online.

Putting the pieces together
RadioShack has very few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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The article Is RadioShack Destined for Greatness? originally appeared on Fool.com.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.The Motley Fool owns shares of Amazon.com, Best Buy, and Apple. The Motley Fool has sold shares of RadioShack short. The Fool has stock on Apple. Motley Fool newsletter services have recommended buying shares of Apple and Amazon.com. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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