We upgrade our recommendation on RadioShack Corp. (RSH) to Outperform based on our assessment that the company is likely to improve its earnings in the future reporting quarters as a result of a significant boom in the wireless industry. Currently it is a Zacks #1 Rank (Strong Buy) stock.
RadioShack is one of the most experienced and trusted consumer electronics specialty retailers in the U.S. We remain optimistic regarding the company’s large, profitable store base and its exposure to the wireless communications business.
The company is generating massive revenue growth from stronger sales of postpaid wireless business and prepaid wireless handsets and airtime. Emphasis on next-generation smartphones like iPhone 4 of Apple Inc. (AAPL) also helps RadioShack improving bottom-line.
Wireless product category is expected to perform well in the future due to the growing demand for feature-rich smartphones, together with management’s decision to extensively roll out its kiosks in Target Corp. (TGT) stores. After a pilot project, management has taken a strategic decision to roll out kiosks for wireless products in the majority of 1,700 discount stores of Target in mid-2011. This mobile service, called “Bullseye Mobile,” started rolling out from mid-August 2010.
Furthermore, RadioShack has recently raised its share buy-back program to $500 million from the previously declared $290 million. Out of this, $300 million in share repurchases will be done on an accelerated basis. The company’s average ROE for trailing twelve month is 20%, significantly higher than the industry average of just 14.7%.
We expect the company’s Return on Invested Capital and free cash flow to increase in the future quarters due to a massive boom in the wireless industry. RadioShack re-launched its “The Shack” brand of retail store chain and emphasizes wireless technology in order to stay in line with future trends.