Earnings Preview: RadioShack First Quarter Report Won't Stop Takeover Talk

Radio Shack (RSH) has been the subject of much takeover speculation in recent weeks and will likely keep a low profile when it reports its first-quarter results on Monday. Analysts expect a small improvement in its financial results thanks to its recent marketing and merchandise initiatives, and some investors hope those will help the company find a buyer.

The electronics retailer's stock has been on an upswing since reports began appearing in March that JPMorgan Chase (JPM) was looking for interested buyers. The appointment earlier this month of Scott Young, a former Best Buy (BBY) merchandising chief, to run its merchandising was also seen as a sign that Radio Shack was dressing up for a sale.

Radio Shack management has not announced plans for a conference call with analysts when it reports results after the market close on Monday -- perhaps to avoid the inevitable takeover questions. Analysts expect the company to post earnings of 36 cents per share this quarter, up 5.9% from the same time last year, according to Thomson Reuters. Overall, the company has managed to do all right over the last year, despite the recession.

The buyout talk has pushed Radio Shack's stock to hit a 52-week high of $24 per share in April, as many observers see a sale as a dead certainty for the company's survival. They argue the chain's niche, selling electronic components to hobbyists, just can't support a successful retail chain, with big boxes such as Best Buy squeezing it out of business.

Changes at the Shack

Radio Shack has been retooling over the last year to focus more on wireless communications and depend less on selling parts and gadgetry for its profits, with some success. But that success is being challenged by Best Buy's new focus on its smaller Best Buy Mobile stores.

Aside from Best Buy, private equity firms could be interested in RadioSchack. But some analysts are discounting the buyout talk, especially since Best Buy recently affirmed its plans to go all-in on its Mobile stores.

Late last month, Goldman Sachs took the Radio Shack out of its "conviction buy" list, saying the retailer's operating results would have to improve beyond what its forecast calls for before it can pull off a successful leveraged buyout.

Analysts who favor Radio Shack note that CEO Julian Day's team has reduced costs and improved cash flow while repositioning the store as a seller of multiple brands of wireless products. It recently scored a deal to sell the iPhone, making it second only to Wal-Mart Stores (WMT) in number of locations nationwide selling that category killer.

Could Go It Alone

Earlier this month, Janney Montgomery Scott reaffirmed its buy rating on the stock and raised its target price from $22 to $25, saying Day's merchandising and marketing initiatives are gaining with consumers. Credit Suisse also discounted the takeover talk recently, saying sales and margins are poised to improve.

"The (takeover) noise is overshadowing a good story and may not come to fruition," noted Credit Suisse analysts, in a note reacting to the takeover talk.

Without a conference call or management pronouncements, Radio Shack's stock will keep moving based on rumors. So expect shares to push higher if Radio Shack beats earnings forecasts, if only because that will make it more attractive to a buyer.

Of course, they may spike in any event, if investors think a disappointing quarter will make the company more likely to seek a buyer. At this point, it's all in the eye of the beholder.