RSH is the most levered firm within our coverage universe, and the equity valuation currently reflects some optionality on the potential for turnaround. We believe that a turnaround will be exceptionally difficult to implement and correspondingly apply a low probability of success. RSH trades at abnormally high multiples, the highest in our space, on rent-adjusted EBITDAR, we believe, reflecting the possibility of a best-case scenario. We do acknowledge that recent financing, and the opening of credit markets in general, have bought RSH time to implement change. We believe that additional time, and management focus, will be insufficient to achieve a best-case scenario, reflecting higher profitability. For RSH to trade at a reasonable multiple to EBITDA or EBITDAR, these metrics would have to increase 4-5x. We don’t find much equity value in our bear-case or base-case scenarios.
Radio Shack may see liquidity troubles next year, he thinks:
RSH’s rent-adjusted debt to EBITDAR ratio is over 9X, and the fixed charge coverage, at 1.0X is the lowest in our peer group. The capital market currently remains open for RSH, but at a cost. The working capital structure, in which there are approximately offsetting payables and receivables with key vendors, provides some insulation against an immediate liquidity issue. But we believe negative cash flows will pressure liquidity as we progress into 2014 and note that in our downside scenarios, cash could be materially eroded, or exhausted, by year-end 2014.