Friday, May 11, 2007

Circut City: Ripe For Buyout

Circuit City (CC) released results last Monday an holding true to current managements history, they disappointed. They restated earnings for the past two quarters and revised its guidance for fiscal 2008. The restatement of earnings took a backseat to news of "substantially below-plan sales" of large flat panel and projection TVs in April, resulting in a larger forecast loss from continuing operations before taxes of $80 million - $90m for Q1'08 (ending in May). It withdrew its previous guidance of an H1 loss of $40m - $50m with a "strong recovery in the second half." Circuit City said if business trends improve and restructuring efforts are effective, then it expects FY'08 earnings from continuing operations (before taxes) as a percentage of sales at the low end of its prior forecast of 1.4% to 1.8%. News now has them replacing the 3,000 highest paid associates.

Shares, now down almost 50% in the past year are priced for a buyout and have great value, sans current management. CC is sitting on $4.05 a share in cash (after LT debt is subtracted), $2.94 a share in owned inventory and last year generated another $2.11 a share in cash from operations. At today's price of $16.72, the cash on hand and value of the owned inventory would give a buyer a 42% return almost immediately or, assuming a buyer would have to pay a premium for the shares, CC's cash and inventory values would more than finance it.

Act one of the new buyers would be to show current management the door. Julian Day at RadioShack (RSH) has shown what good management can do for investors and a buyer of Circuit City woulds have the same opportunity. CC has appealing stores in good locations with a nice product mix, they are just abysmally run.

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