RadioShack Is Beginning to Flirt With the Delisting Line

Battled electronics retailer RadioShack (RSH) was battered by double digits on Tuesday thanks to an earnings release that was worse than expected.

Radioshack earnings RSH stockAnd let me emphasize that expectations were not high going into the release.

RSH announced revenues for the quarter that were down 13% year-over-year, and its 97-cent loss per share was almost double the consensus estimate of a 52-cent loss.

Worse, same-store sales — one of the most telling measures of a retailer’s health — dropped a gut-churning 14%.

I’m not going to write another article about how RadioShack is doomed due to competition from big-box retailers and the Internet — though it most certainly is — or why buying RSH stock is a terrible idea. I thoroughly beat up RadioShack two years ago when I advised against chasing the 10% dividend that RSH stock was paying at the time.

Instead, I want to focus on the nuts and bolts of what happens to a stock in RadioShack’s position.

When a Company Delists

RSH stock is priced at less than $1.50 per share and has traded as low as $1.12 this year. It’s perilously close to the $1 threshold at which a stock gets delisted from both the Nasdaq and the New York Stock Exchange.

For a listed company to remain listed on the NYSE, certain standards have to be met. The stock price cannot fall to below $1 over a 30-consecutive-trading-day period.

That’s a simple standard and easy enough to remedy when broken. A company in RadioShack’s position can always do a reverse split, whereby they effectively combine shares. In such a scenario, RadioShack could, say, issue one new share of stock for every 10 existing shares.

But after the price criteria, there are other valuation criteria that get harder to skirt. For instance, a stock must maintain an average market capitalization of at least $50 million over a 30-consecutive-trading-day period (other standards using shareholder equity or revenue can also be used; see continued listing requirements for a full list).

Obviously, major corporate events such as bankruptcy or buyout will also trigger a delisting, as can a failure to file financial statements in a timely manner.

And sometimes, companies simply choose to delist. For example, German industrial giant Siemens (SIEGY) very recently gave up its NYSE listing and now trades in the over-the-counter market. Siemens found that it already had sufficient liquidity trading in Europe, and the added benefit of listing in the U.S. was not worth the added compliance cost.

Also, delisting does not happen immediately. When a company fails to meet the criteria, they are notified by the exchange and given time to remedy the situation via a reverse split, a secondary offering or some other action.

So, how does this all apply to RadioShack?

RadioShack Stock – Safe for Now, But…

As of this writing, RSH stock has a market cap of about $140 million, and it has maintained a price of above $1 per share, so it is not at immediate risk of being delisted. But if you’re reading the tea leaves, it doesn’t seem unlikely.

Delisting isn’t always a curse, as I said before. I currently own the aforementioned Siemens, and I consider its delisting to be a nonevent. Siemens is a healthy company with more than sufficient liquidity in both Germany and in the U.S. over-the-counter market.

In fact, I own several European companies that trade over-the-counter, including German automaker Daimler (DDAIF) and Swiss confectionary giant Nestle (NSRGY).

But would I want to own a delisted American company?

Absolutely not. Remember, if a stock has been involuntarily delisted, it is because it has failed to meet basic quality standards, and the exchange is effectively washing its hands of it. Stocks that are delisted are often on the express train to bankruptcy and should be avoided.

And RadioShack?

It will stick around on the Big Board a little longer, it seems. But I wouldn’t recommend buying it.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he was long DDAIF, NSRGY and SIEGY. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.

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