Thursday, June 21, 2007

Another Update: Circuit City

The past week and a half I have been doing updates on previous posts ans since Circuit City reported earnings Tuesday, it is as good a time as any to update that post.

In my early May post, I speculated that Circuit City (CC) was "ripe for a buyout". Has anything changed?


"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."


Shares have been flat lined since then (currently $15.82) despite the just recently announced $82 million loss (33 cents a share) vs last years $8 million profit (3 cents). What does this mean? Shares do not have much more downside. Cash on hand has been cut in half and debt remains the same, irrelevant and owned inventory levels are the same. Should you buy CC now? I would stay away as long as current management is there. They have withdrawn all guidance for the year. They did this not for the same reason Eddie Lampert at Sears (SHLD) or Julian Day and Radioshack (RSH), they did it because as they said "Combined with an uncertain macroeconomic environment, for the time being, it is difficult to project sales and earnings performance for the balance of the fiscal year. As a result, we are withdrawing financial guidance at this time," said CEO Philip Schoonover. Translation? We have no idea what is going to happen from here. While I applaud their honesty, they should have an idea of what is going to happen.

As a trade, any good news could vault shares up immediately. But, I do not see the conditions that could create that good news anytime soon. Maybe they could get bought out and that would cause shares to jump, but, I am reluctant to invest on the prayer someone rescues them. An Eddie Lampert, based on past history would just be as likely to wait for these buffoons to run it into bankruptcy and buy it there even cheaper than now. Why pay a premium to the current price when in bankruptcy he could get it for a fraction of it?

At their current rate CC will be out of cash before Thanksgiving and then the fun really starts. This assumes they do not start ramping up debt to pay for operations and also assumes no further economic slowdown. Should the economy slide even more, see ya...

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