Indeed, you can probably assume that the electronics retailer will disappoint investors yet again when quarterly results are released this Tuesday, April 24.
But here's the rub: this stock has fallen so sharp, that a financial or strategic buyer could offer
a 50% premium and still pay a low price for this company. RadioShack has generated an average of $150 million in annual free cash flow
-- on average -- during the past eight years. The company is now valued at just $600 million, and its fairly strong balance sheet (with $592 million in gross cash) is precisely the kind of weapon that private-equity firms like to target.
RadioShack was the subject of buyout rumors when its stock was at $20 -- and investors got burned. Now, with shares off 70%, those rumors are back, though this time the downside risk
in the stock seems much lower. Again, it's foolish to own a stock like this in hopes of a buyout, but the dowdy valuation means it's already a bargain on the fundamentals.
Could this be the next big energy deal?
Investors may also seek continued M&A in the energy sector, especially as natural gas-focused firms are short of funds to exploit their assets. As an example, Chesapeake Energy (NYSE: CHK)
is scrambling to raise cash to meet its 2012 capital spending plans, and fears of balance sheet troubles have pushed this stock below $20 for the first time since 2009. (Behind-the-scenes dealings by CEO
Aubrey McClendon that have raised conflict-of-interest concerns have also pressured shares.)
Chesapeake is now worth less than $12 billion. Note that Exxon Mobil (NYSE: XOM)
paid more than $40 billion to acquire XTO Energy in 2010, and Chesapeake's current energy assets are even more extensive than XTO's were. To be sure, natural gas prices are now much lower, but strategic investors such as ExxonMobil know this won't last and may well conclude that Chesapeake is too much of a bargain to pass up.
Risks to Consider: Companies such as RadioShack, Chesapeake Energy, Best Buy (NYSE: BBY), Nokia (NYSE: NOK) and many others have made a series of missteps to find themselves in the bargain bin, and further missteps can't be ruled out. That's why you must stress-test a company in terms of its downside support. Action to Take -->
It's wisest to focus on quality companies that are simply out of favor such as Freeport McMoran, Kroger or RadioShack. If you hear of buyout rumors, go straight to the financial statements
to be sure that these companies have the assets or the cash flow to support the stock, even if buyout rumors evaporate.
-- David Sterman
David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of RIO, CHK in one or more if its "real money" portfolios.
This article originally appeared on StreetAuthority
Author: David Sterman