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Option Tip – Friday, October 21, 2011
RadioShack Puts



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This is an option tip based on the fact that RadioShack will likely start next week’s earnings, not with a bang, but a whimper.



RadioShack HQ

Analysts overly optimistic about this shrinking player.

Amid the flood of earnings reports next week sits a well-known retail name, though it’s one that is struggling to find its groove. The company is RadioShack (NYSE: RSH), which reports earnings on Monday, 24th October, 2011, before the open.

Description of Radio Shack

These stores are tuned to your electronics needs and desires. RadioShack is a leading consumer electronics retail chain with some 4,675 stores in the US and Mexico. Its shops and website offer a variety of products, including wireless and residential telephones, computers, DVD players, electronic toys, and, of course, radios.

RadioShack Store

For its more mobile customers, its sells third-party wireless calling plans from AT&T, T-Mobile, Sprint, Verizon, and others. RadioShack stores also sell a wide range of electronics parts, batteries, and components.

The chain runs about 1,175 dealer outlets and more than 1,300 wireless phone kiosks located inside Target stores (kiosks are not RadioShack-branded).

The Reasoning for the Option Tip

Analysts expect RSH to report 36 cents per share, a penny less than a year ago. Over the past three months, the consensus estimate has fallen from 38 cents. Analysts are projecting earnings of $1.59 per share for the fiscal year.

A year after being $1.05 billion, analysts expect revenue to fall 0.2% year-over-year to $1.05 billion for the quarter. Revenue is expected to come in at $4.43 billion for the year.

But that’s a rather optimistic outlook, given that the company has averaged shrinkage of -16.6% in year-over-year earnings per share over the past three quarters.

RadioShack’s current dividend yield is 1.9% based on Tuesday’s close of $13.04. The company has an annualized dividend of $1 per share.

Analyst Ratings Affecting the Option Tip

Analysts generally think investors should stand pat on RadioShack, with 13 of 19 analysts rating it hold. RadioShack’s average analyst rating hasn’t changed over the past three months.

Furthermore, the retailer has had problems meeting analyst expectations. Over the past two years, the company has had three beats, three misses and two meets. That’s not exactly a track record that inspires much confidence among investors, which is why performance after recent reports has been spotty at best.

Trends to Support the Option Tip

On the charts, the stock has been on a slide for the past 18 months, dropping more than 45% from its April 2010 peak. The shares are down 30% this year, although they’ve been treading water for the past four months. But the descending 100-day moving average is now in play, as is the $13 level, which houses some heavy call open interest. That combination has proven stubborn to overcome for the past week.

A decline in revenue in the second quarter snapped a streak of three consecutive quarters of growing revenue. The 6.9% revenue decline in the most recent quarter can be compared with three quarters prior when it had been rising. It increased 2.1% in the first quarter, 3.8% in the fourth quarter of the last fiscal year and 6.2% in the third quarter of the last fiscal year.

The company has seen profit decline in each of the last three quarters. In second quarter, net income fell 53% from the year earlier, while the figure fell 29.9% in the first quarter and 24.7% in the fourth quarter of the last fiscal year.

RSH graph



RadioShack used to be the destination for electronics do-it-yourselfers. But its position has steadily eroded under the weight of much-bigger competitors such as Best Buy (NYSE: BBY) and Wal-Mart (NYSE: WMT). Throw in the Amazon.coms (NASDAQ: AMZN) and Targets (NYSE: TGT) of the world, and it’s clear that RadioShack is struggling to find its niche.

Even the addition of the iPhone to its product mix hasn’t moved the needle. The company only carries the AT&T (NYSE: T) version, and consumers haven’t seemed to connect the two brands. While iPhone 4S units have disappeared from most other store shelves, the phone is in plentiful supply at your local RadioShack.

To put it succinctly , that’s not an encouraging sign heading into earnings.

The Option Tip

The option tip for Radio Shack (RSH) is to buy the RSH Nov 13 Puts for less than a dollar.

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