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RadioShack Upgraded to Neutral

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On January 17, we upgraded RadioShack Corp. to Neutral based on the company’s extremely low level of current valuation and management’s recent decision to terminate its unprofitable deal with Target Corp.

Why the Upgrade

The stock price of RadioShack plunged more than 79% in the last year, significantly underperforming the S&P 500 return of 14.4% in the last year. The nationwide retailer of electronics and mobile gadgets is currently trading at the low-end of its 52-week price range. With respect to several valuation metrics, RadioShack is also trading at significantly lower multiples compared to the S&P 500. We believe, the company is currently fairly valued and provides limited chance for further downslide of its stock price. RadioShack currently has a Zacks Rank #2 (Buy).

Other Positives

On January 14, ina major strategic move, RadioShack and Target Corp. have agreed to dissolve their existing business relationship. In 2010, RadioShack entered into an agreement with Target to roll out Kiosks for wireless products in 1,500 discount stores of the latter. However, ever since its inception, the deal has been unprofitable for RadioShack. The company was managing only the postpaid mobile business of Target, which is a low-margin one. It has no access to high-margin prepaid mobile business or the highly lucrative phone accessories business of Target. We believe that termination of the Target deal will be a blessing for RadioShack. According to management the agreement will come to an end on April 8, 2013.

RadioShack has undertaken a global expansion strategy. In April 2012, RadioShack announced a franchise deal with the Malaysian conglomerate, Berjaya. Berjaya expects to open 1,000 stores over the next 10 years in several South-East Asian countries including Vietnam, Malaysia and Thailand. In a bid to tap the growing Asian market, RadioShack has joined hand with Asian retailer Cybermart to open small retail outlets in China, Taiwan, Hong Kong and Macau.

Other Stocks to Consider

Besides RadioShack, other stocks in the electronics retail sector that are currently performing well include Conns Inc. (CONN - Free Report) , Aaron’s Inc. (AAN - Free Report) and GOME Electrical Appliances Holding Ltd. . While Conns currently has a Zacks Rank #1 (Strong Buy), Aaron’s and GOME both have a Zacks Rank #2 (Buy).

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