RadioShack: Strong Signals Amid The Static

"If we needed further evidence that the 'edifice complex'—or corporate lust for shiny new headquarters buildings—is a contrary indicator of performance, we got it from RadioShack (RSH). Just 16 days after the March grand opening of its Fort Worth campus, the retailer cut its earnings guidance. The stock sank 11%." ...

"Wall Street's disappointment in RadioShack can't be blinked away. After gaining 3% last year, comparable-store sales fell 1% in the first quarter. Yet there's no reason to start tapping out S-O-S.

"RadioShack's gross margin comes to 50.2%, according to Capital IQ, a unit of S&P. These are not quite the margins of, say, an Intel (INTC) (57.6%), but they kill those of rival Best Buy (BBY) (23.7%) or even luxury retailer Neiman Marcus Group (NMG) (35.2%). Yes, sales growth is important, but a fat gross margin solves many problems because even small sales gains mean a leap in profit.

"Gary. As in Gary Kusin, the newest independent director on RadioShack's board. He did not respond to my inquiries, but in a pair of recent Securities & Exchange Commission filings, he reported purchasing 40,000 RadioShack shares for $996,942. The trades made Kusin, whose day job is CEO of FedEx Kinko (FDX), the biggest owner among RadioShack's outside directors. Alone, this big insider buy is no reason to call your broker.

"But as John Linehan, manager of the T. Rowe Price Value Fund (TRVLX), told me, "I'd much rather see [insiders] buying than selling." His fund owns the stock for its ability to generate steady free cash flow. Linehan thinks RadioShack is worth something closer to $35.

"While the company carries noticeably more debt than Best Buy and Circuit City Stores (CC), its current valuation compares favorably. Besides those risks common to retailers—weaker economy, lower consumer spending—investors in RadioShack also must worry that it will borrow more money to drive sales growth via such current initiatives as store remodelings.

"A redesigned Web site is due by September, and fresh advertising from a new ad agency is set for the fourth quarter. That said, on any nice surprise the stock is priced to jump."