The current market isn't a particularly simple one to invest in. However, here's a no-brainer: avoid investing in severely competitively-challenged companies like RadioShack (NYS: RSH) .
What's a radio? Besides the fact that even RadioShack's name is a glaring anachronism, the company competes in one of the most difficult retail areas these days: consumer electronics. When big-box consumer electronics giant Best Buy (NYS: BBY) is so desperate to turn its own fortunes around, that its management decides that the feeble attempt to test out copying Apple's (NAS: AAPL) store concept is a reasonable idea, then you know there's trouble.
RadioShack was once known for selling gadgets and gizmos like cables and batteries for diehard tech geeks. But, at this point, online commerce sites like Amazon.com (NAS: AMZN) are perfectly good and, maybe, even preferable alternatives for such purchases -- and far more convenient, too.
These days, RadioShack might as well be known as MobileShack, given its emphasis on peddling smartphones and related accessories. Of course, it's also not like RadioShack's got the corner on that market, either, as was evidenced last quarter. It's not like companies like Sprint-Nextel (NYS: S) , and Verizon don't have their own showroom-type stores for these purchases.
As for recent news that RadioShack plans expansion in China, don't take the bait. International expansion is exceedingly difficult, particularly in a culture as different as ours is from China's. I don't put RadioShack's statistical chances at overseas growth very high.
Fuzzy financial transmissions: RadioShack's operational acumen has been dropping like a rock for years now. For example, RadioShack's five-year compound annual growth rates have been negative; that means the company has generated negative 1.1% in sales over that timeframe, and a 23% decline in net income.
Figures like gross profit margins tell an ugly tale on this stock, too. Way back in 2000, RadioShack generated 49.4% in gross profit. Last year, that figure is just 40.8%. RadioShack's been taking major hits as it sells more low-margin consumer electronics.
RadioShack's balance sheet isn't entirely comforting, either. Although it does have cash, its debt-to-capital ratio reached 47.7% in the last 12 months. That's uncomfortable for a company that has been reporting declining, or rather anemic, sales growth over the last several years. It could be worse, but it could be much better, too -- and it's going to get worse.
The price isn't right: I suppose that investors could simply insist that RadioShack's stock price is incredibly low. It trades at 11 times forward earnings. But, oh wait: rivals trade at cheaper multiples. HHGregg (NYS: HGG) trades at nine times forward earnings, and Best Buy sports has a forward price-to-earnings ratio of just six. They all face serious challenges, but RadioShack's simply priced too high.
It's time to sell the Shack and seek better shelter. RadioShack is anything but cheap given the challenges it faces and the desperate competitive landscape.
I don't believe RadioShack has an incredibly bright future overseas, but our analysts identified an international retailer as The Motley Fool's Top Stock for 2012. To find out more about this fascinating stock idea, click the link for your free report.
At the time thisarticle was published The Motley Fool owns shares of RadioShack and Best Buy. The Fool owns shares of Apple.Motley Fool newsletter serviceshave recommended buying shares of Apple and HHGregg.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Apple. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.Alyce Lomaxdoes not own shares of any of the companies mentioned.
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