RadioShack's Dwindling Market Cap Presents Latest Challenge
March 14 2011 - 1:43PM
Dow Jones News
As if there weren't enough worries weighing down RadioShack
Corp. (RSH) shares, add the company's dwindling market
capitalization to the list.
Fort Worth, Texas-based RadioShack, which has transformed its
operations from an all-purpose tech retailer to a more narrowly
focused mobile-device retailer, has seen its stock price slump in
recent months amid margin pressures from its disappointing T-Mobile
business, increased competition and weakness related to its kiosk
business.
The stock has lost more than a third of its value since October.
RadioShack now has the lowest market cap in the Standard &
Poor's 500 index, prompting concerns that it could be in danger of
getting delisted from the index, a process that potentially could
further weigh on the stock.
To be sure, a de-listing isn't imminent and a company with the
lowest market cap isn't automatically the first to go when S&P
announces changes to the index. But analysts caution that if a
de-listing were to occur, it would provide further uncertainty for
the troubled stock.
"It would be more of a near-term trading issue rather than a
longer-term reason to want to buy or sell the stock," said Brad
Thomas, an analyst for KeyBanc Capital Markets.
The S&P 500 aims to emulate the broad U.S. economy and
reflect changes in both consumer behavior and the overall
marketplace. There are generally about 30 changes in the S&P
500 throughout a typical year, usually due to mergers and
acquisitions. In 2010, there were fewer changes because of less
deal activity.
"We generally don't comment on stock price movement, specific
market indexes, listings, movement on or off indexes," RadioShack
said in an email. "We are entirely focused on our business
operations and on creating value for our shareholders."
RadioShack, which has been a member of the S&P 500 since
March 1973, currently has a market cap of about $1.5 billion,
according to FactSet Research, which is line with that of companies
who recently have been booted out of the S&P 500.
While a company's market cap must be at least $4 billion to be
considered for inclusion in the S&P 500, there isn't a set
threshold for removal. Also, unlike the Russell indexes, which are
reconstituted annually, there is no set schedule for changes in the
S&P 500.
Howard Silverblatt, S&P's senior index analyst, said S&P
looks at whether a company is the best representation of a
particular market before deciding whether it should be taken out of
the index. Even though RadioShack's market cap is well below the
minimum threshold for inclusion doesn't mean it will be the first
to go when changes to the index are announced.
Stocks face selling pressure when they are removed from the
S&P 500 as index managers rebalance their portfolios.
Silverblatt estimates 11.4% of the shares of S&P 500
constituents are held by licensed index funds or managers, with
more emulating the index.
S&P attempts to give the market a one-week notice before
dropping a component, which attempts to limit volatility,
Silverblatt said. But once a company gets eliminated from the
index, its stock generally faces selling pressure as index funds
are forced to liquidate their positions in the outgoing
component.
"The worry is you get a period of time where any index fund
that's set up to track the S&P 500 needs to sell RadioShack
stock," KeyBanc's Thomas said.
RadioShack shares Monday were recently down 2.7% at $14.47.
RadioShack is suffering from declining margins mainly due to
disappointing T-Mobile sales; worries about its kiosk business,
which is moving to Target Corp. (TGT) from Wal-Mart Stores Inc.'s
(WMT) Sam's Club; and an ongoing management turnover.
Still, not all is negative for RadioShack's stock price. It has
long been a favorite of the takeover rumor mill as reports last
year pegged Blackstone Group LP (BX) and even Best Buy Co. (BBY) as
potential suitors. Also, the stock already trades at a cheaper
valuation than peers Best Buy and HHGregg Inc. (HGG), a regional
appliance and electronics retailer.
As a result, KeyBanc's Thomas said any RadioShack stock weakness
related to an S&P 500 change should be viewed as a buying
opportunity.
"We believe that some of the near-term fundamental headwinds are
balanced by a higher degree of cash flow and inexpensive
valuation," Thomas said.
-By Steven Russolillo, Dow Jones Newswires; 212-416-2180;
steven.russolillo@dowjones.com