RadioShack – The Vultures Are Circling RSH Stock. Should You Be?

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RadioShack (RSH) just can’t buy a break.

RadioShack RSH Stock BankruptcyRadioShack’s plans to close 1,100 stores over the next five years were scuttled by lenders in mid-May when the terms for allowing it to do so were deemed unacceptable by RSH management and board. As a result, it’s closing fewer stores and will instead find other ways to cut costs.

The move ramps up RadioShack’s losses, hurting whatever life is left in RSH stock.

The vultures are circling.

Does RadioShack have any chance of avoiding bankruptcy? Credit default swaps protecting against non-payment of debt indicate there’s an 86% chance of default by June 2015.

With the company’s best option for reducing its cost structure gone and vendors holding all the cards, the odds of a recovery in RSH stock get slimmer by the day. Thing is, battered companies toying with destruction do, on occasion, reward the speculative bull. But is RSH stock one of those kinds of plays?

Here’s how I see it.

How RadioShack Turns It Around

RadioShack closed at $1.21 heading into the Memorial Day holiday weekend. RSH stock hasn’t been this low since 1978 — six presidents have served in the White House in that time.

While it only has to lose $1.21 to go to zero, a 100% increase in the value of its stock would put it at $2.42 — still 54% lower than its 52-week high of $4.36.

The upside is certainly much greater than the downside at this point.

Although RadioShack’s slow death march has been ongoing for some time, it really didn’t pick up speed until 2010. However, in 2013 — well after its demise had begun in earnest — RadioShack hired Joe Magnacca away from Walgreen (WAG) just a week after being promoted to executive vice president of the nation’s largest drug store chain.

Magnacca was an up-and-comer at Walgreen, but he opted for a Herculean challenge over another promotion. It’s that kind of determination and drive that could ultimately reignite RSH stock.

Magnacca has been at the job for 16 months now, and he continues to tinker with RadioShack’s management to provide the best customer experience possible while generating a profit. Joe Magnacca’s five-point plan is going to take time, however. One of the five pillars of the plan took a big hit with the decision to reduce the number of store closings, but otherwise not much has changed at RadioShack when it comes to its turnaround.

As long as liquidity remains, Magnacca et al. will continue to push its “do-it-together” mantra with customers. That’s its best shot to win back customers and push RSH stock higher.

How RSH Stock Hits Zero

As I mentioned, there is a good chance RadioShack could default on its loans.

In addition to Bloomberg’s research, Markit research suggests that credit default swaps imply a 40% chance of default by the end of this year and a 95% chance by the end of 2019, according to Financial Times. Fitch recently downgraded RadioShack’s credit rating to CC from CCC, stating that it’s “increasingly concerned about the RadioShack’s ability to operate beyond 2014 given the significant cash burn in the business … [there is] no apparent catalyst for a turnaround.”

Any further downgrades would most certainly spell the end for RSH stock, as bankruptcy would be imminent.

With holiday 2014 only six months away, vendors are becoming increasingly scared that they won’t be paid for merchandise shipped. That’s going to hamper RadioShack’s move to re-merchandise its stores. If it doesn’t get the right mix to drive sales for the holiday season, it will most certainly run out of cash by the end of 2014. If that happens, you can be sure bankruptcy is just around the corner.

Once again, what’s good for the lenders isn’t necessarily good for shareholders and RSH stock.

Bottom Line

You shouldn’t consider RSH stock and this speculative bet if you can’t afford to lose every penny — because it has a very good chance of happening.

While it was admirable for Magnacca to take on this impossible task, he’ll be compensated handsomely regardless of what happens. He’s not going anywhere through the end of 2015.

So the question is whether you think he already has earned enough — $1 million signing bonus in 2013 plus $300,000 for getting its concept store developed and $1.3 million in non-equity cash compensation including salary — to stop caring about the 3.5 million shares of RSH stock he’s been awarded and would forfeit in the event of a bankruptcy.

Personally, I don’t think so, despite the fact RadioShack’s bankruptcy could be deemed a change of control and worth $5.7 million to Magnacca in any subsequent termination. While the lenders are beyond his control, I believe Magnacca’s going to do everything in his power to keep RSH stock afloat because he knows if it hits $10, he’s worth considerably more than if it goes into the tank — regardless of his severance.

While I’m no expert on selling put options, the July 2014 $1 strike looks like a good way to play RSH stock. If it goes up over the next two months, you earn some very good income. If RSH gets put to you, you’ve bought its stock at a 17% discount to its May 23 closing price.

Although I do think there’s a good possibility RSH stock won’t be trading this time next year, I also believe hedge funds are buying at these prices. If you’ve got $5,000 to throw away, the upside rewards are much greater than the downside risk. If it goes to zero you’ve lost $5,000. If it goes to $10, you’ll be sitting on eight times your original investment.

No risk, no reward.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2014/05/rsh-stock-radioshack-bankruptcy/.

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