This article is a reprint of my March 10, 2008 RealMoney column

• I don’t expect RadioShack to grow.
• But it should be worth buying as long as they can limit their cash flow declines to 5% or so annually.
• Combined with a put-write strategy, it looks even better.

RadioShack (RSH) is a company investors love to hate, and it isn’t hard to see why. Stocked full of stuff you occasionally need but often find elsewhere, it represents the unsexy part of consumer technology – wires, batteries and cables that you forgot to pick up when you got the HDTV or game console at your local Circuit City (CC) or (more likely) Best Buy (BBY).

What’s more, RadioShack’s 4,400-odd company-owned stores, on average, sold 6.7% less stuff in the fourth quarter of 2007 than they did in 2006. This is an improvement from the full-year same-store decline of 8.2%, which is partly attributable to the fact that 525 stores have been closed since year-end 2005. Many of these, presumably, were the worst-performing ones. Having fewer of the really bad ones open for the last 12 months will contribute to improving same-store figures.

Now that the low-hanging fruit has been picked, investors need to figure out whether what remains is worth climbing what could be a rickety ladder. Most investors tend to shy away from companies that aren’t growing, and generally flee from those that are shrinking. Still, even shrinking companies are worth something, and investors can be rewarded if they pay the right price.

The valuation is certainly cheap, at ten or eleven times earnings. My preferred measure, the free cash flow yield, is a downright juicy 14.3%. With that kind of cash flow yield, RSH could generate double-digit returns even if cash flow declined 4.3% per year. With five-year Treasuries yielding just 2.5% the declines could be even larger and still earn investors the typical risk premium that would be expected for holding stocks.

With the question thus changed from whether RadioShack can ever grow again, to how much shrinkage is currently priced in, the analysis becomes a bit less sticky. For this, I think I’d accept a return in line with that of RadioShack debt – which reflects the company’s relative risk and allows for a modest premium based on the more favorable tax treatment of equity returns.

RadioShack’s May 2011 note is currently yielding about 7%. To generate equity returns higher than this, RadioShack will have to limit its free cash flow declines to 8% per year – in other words, they can’t get any worse.

RadioShack attributed the same-store sales weakness in 2007 to “a decline in postpaid wireless sales for our two main wireless carriers.” Wireless sales account for a third of RadioShack’s business and those two carriers are Sprint (S - Annual Report) and AT&T (T - Annual Report). Sprint’s performance has been pathetic, while AT&T is relatively weak in the Northeast, particularly RadioShack’s largest market – New York City. The contracts with AT&T and Sprint don’t expire until 2015 or later, so there isn’t much hope for a carrier shake-up. On the other hand, Sprint is now so bad that incremental further declines may cease to register.

Investors seem to be picking up on the potential value, as the rally following the latest earnings report has given the shares some fragile support. Given the state of the economy and particularly RadioShack’s wireless exposure, I think the company will eventually stem the bleeding to within my acceptable range, but probably not this year.

As is often the case, though, I think the doubt can be addressed by using a put-write strategy to enhance returns and further reduce the potential entry point. As I write this, April $15.00 puts are selling for $0.80 – a 5.3% premium on money that is risked for about six weeks. If the stock declines and the options are exercised, the effective entry price would be lowered to $14.20 – a price that would boost the effective free cash flow yield to 17.8% and increase the margin of safety to permit an acceptable return even with annual free cash flow declines of 10%.

That starts to look like a risk worth taking.

Disclosures: William Trent has written put options against the shares of RadioShack (RSH)

photo credit: lucasreddinger

This article is a reprint of my February 22, 2008 RealMoney column

Forget the debate over whether telecom is a buy or sell. Make money being indifferent.

The decisions by Verizon (VZ - Annual Report) and AT&T (T - Annual Report) to offer unlimited wireless plans for $100 has launched a furious debate at RealMoney over whether the move is the right thing or the wrong thing to do. I see both sides of the story, and if anything lean toward the side of the bulls. But while the bulls and bears hash things out, I think investors can make money by being neutral.

To sum up the arguments, on the bearish side Tero Kuittinnen notes that “The AT&T and Verizon growth stories rest largely on their mobile service, and the mobile service growth hinges on mobile data, not voice. Investors are going to be deeply disappointed if Verizon’s mobile data growth keeps cooling down from the still-torrid 53% pace of the fourth quarter of 2007. For Verizon, mobile data revenue still generates just $11 a month out of the overall $51 average revenue per user. The data growth has to continue to run hot, or the overall ARPU will start declining.”

Jim Cramer counters that “the stock can trade back up toward the high $30’s over the coming quarters as the market comes to realize that these wireless price cuts are a savvy move to take market share from Sprint Nextel (S - Annual Report), which appears to be in serious trouble.”

In the short term, I’m making absolutely no forecast about the effects of the wireless pricing cut, the effects of a potential recession, or the stock price. But there are a few facts to consider that explain my lean toward the bull side.

First, this isn’t the first time in recent memory that there has been a competitive telecom environment. Since the 1996 telecom act, everybody from CLECs to independent wireless operators to cable and long distance companies has taken their shots at the big integrated telecom firms. Several of those categories of competitors no longer exist in any meaningful fashion. So, while it’s true that the pricing power in telecom may not remain at the high levels enjoyed of late, a competitive environment is nothing these companies haven’t seen before.

Second, Verizon is going to continue churning out massive amounts of cash. Its operating cash flows have been roughly $20 billion or more each year this century, and even the dual wireless/FIOS buildouts have required no more than $17.5 billion in capital expenditures. The $5.8 billion in free cash flow generated over the last 12 months leaves more than enough to pay the handsome 5.1% dividend yield that has attracted Cramer’s attention.

Finally, Verizon is getting close to massive technical support at $30. The only time this stock has traded with a $2-handle is for a couple of months in 2002 around the trough of the telecom bust.

Still, I promised that investors could make money in this name without being bullish, and those who know me probably realize I am talking about writing options. I just wrote March $32.50 put options for $0.95. If the stock stays above that level, I collect a 2.9% yield in the next month. Given that Treasuries pay less than that for one year, getting it in one month simply by being willing to buy a utility-like cash flow stream seems like easy money to me.

If the stock continues to slide, I’ll get an effective purchase price of $31.55, from which my dividend yield will be 5.5%, taxed at a more efficient rate than the smaller Treasury yield. Alternatively, I could turn right around and write covered calls to reduce my exposure still further. Those who currently own the stock could also consider covered call writing to enhance their yield.

Yet another useful option strategy here relates to Cramer’s plan to scale into Verizon over time, potentially bringing his initial 1,000 shares up to 4,000 or 5,000. Why not write some puts with staggered dates to accomplish that? Again, using the $32.50 puts, the following table shows how this could work.

Scaling Into Verizon by Writing Puts

Sources: Option quotes obtained from Fidelity Investments at time of writing

Assuming all the options get exercised against him, Cramer would achieve an average purchase price of $31.11 per share, scaling in over time at progressively lower effective entry prices. If the stock stays right where it is, or goes up, he collects a total of $8.35 in option premiums for the shares he never buys.

To me, that sounds like a winning strategy.

Disclosures: William Trent has written put options against the shares of Verizon (VZ - Annual Report)

My RealMoney article from December 7, 2007:

CSG Systems (CSGS) is a leading provider of customer care and billing services for cable operators, including Comcast (CMCSA), Echostar (DISH - Annual Report), and Time Warner Cable (TWC). Since July, when the company announced in a shortfall in cash flow from operations, the shares are down more than a third. The current price may be a good opportunity for investors to buy a stable cash flow generator.

The cash flow shortfall in the second quarter was “due to unexpected changes in certain operating assets and liabilities at quarter end” as was largely made up in the third quarter. But don’t get me wrong - there are plenty of good reasons to explain the recent share price decline.

Let’s start with customers - the relationship with Comcast has been touchy at times, stemming from lawsuits related to Comcast’s 2002 acquisition of AT&T (AT&T’s former cable assets). That relationship seems stable now, but things could always get dicey again.

Then there is all the talk about Echostar being taken over. A merger with a company like AT&T (T - Annual Report) that does not use CSG’s services could mean CSG loses its number two client.

Next, even without any mergers and acquisitions activity going on CSG stands to lose when its customers have fewer bills to send out. Increased competition from telephone companies like AT&T and Verizon (VZ - Annual Report), along with trouble related to the housing market, have led both Echostar and Comcast to cut customer growth estimates recently.

So, suffice to say there are plenty of reasons to be concerned about CSG’s prospects in the near term. Now we have to figure out whether today’s one-third-off sale fully reflects those potential concerns. I think it does.

The Positive Side

If there is one thing to like about CSG Systems, it is that the earnings are predictable. Consider the last 12 quarters, which I charted below.

Source: Zacks Research Wizard

The knock against predictability, of course, is that the earnings are going nowhere. They have been stuck in neutral at $14-$16 million per quarter for much of the last three years. On the other hand, the company generates tons of cash - $105 million worth of free cash flow (cash from operations less capital expenditures) over the last 12 months.

And it uses most of that cash flow to buy back stock. In the third quarter of 2007 there were 17.5% fewer shares than there were in the same quarter last year. As a result, the earnings per share are far from stagnant. In fact, the last 12 months of EPS were 16.1% higher than the preceding 12 months.

Now that the share price has come down, the buybacks are having a bigger impact than ever. At the current pace, the company could take itself private within six years.

Free Cash Flow Yield

With $95 million in free cash flow and a current enterprise value of $638 million, CSG is sporting a free cash flow yield of more than 16%. Even if the $65 million they spent on acquisitions this year is deducted, the free cash flow yield would still be a healthy 6.2%, offering a solid risk premium over Treasuries.

With that kind of risk premium, investors look to be well compensated for the risks I outlined.

Zacks Investment Research has provided Stock Market Beat with a complimentary trial subscription to Research Wizard.

Originally published at RealMoney on September 19, 2007.

Tony Crescenzi says the latest PPI report should be tossed because the benign headline reading will almost certainly be reversed in the months ahead owing to the surge in energy costs that has occurred of late. I say not so fast! If prices are rising, that means some companies out there are likely to see better profits. Before tossing out the report, I’m betting we can figure out who a few of them will be.

The Bureau of Labor Statistics, which prepares the PPI report, provides detailed information on an industry basis. The problem is figuring out how to find it on their web site. Starting at the PPI home page, I scroll down to the headline that says “Get Detailed PPI Statistics” then click on Industry Data. You can then pick out which industries you want to see (I pick ‘em all) and click “Retrieve Data.” Then I select “More Formatting Options” and click on the boxes for 12-month percent change, all years, and include graphs. Once I hit “retrieve data” again I have what I’m looking for - graphs that make it easy to tell which industries are gaining or losing their pricing power.

First up is the fruit and vegetable canning industry. At 5.3% year/year inflation, pricing is clearly better than normal. It is down from a recent peak but still looks to be generally in a rising trend.

Possible plays on this industry include can makers such as Ball Corp. (BLL), Crown Holdings CCK - Annual Report), or Silgan (SLGN - Annual Report). Or you can go to the food processors such as Campbell Soup (CPB), Del Monte (DLM - Annual Report), Hain Celestial (HAIN), or HJ Heinz (HNZ).

Looking better still are industrial valves, up 9.3% year/year against tough comparisons.

Some of the industrial valve makers include Flowserve (FLS), Crane (CR) and Curtiss Wright (CW - Annual Report).

But enough with boring “old” industries. How about tech? It is seldom that tech prices actually increase, but sometimes they decline at a slower than usual pace, which can provide a similar opportunity. That may be the case right now with computer storage devices.

Last month’s 2.9% decline from last year was the smallest price drop on record for this industry, and the ongoing consolidation may help the trend continue. Plenty of ways to play this one, including Brocade (BRCD), EMC (EMC - Annual Report), Iomega (IOM), Hutchinson (HTCH), Quantum (QTM), Sandisk (SNDK - Annual Report), Seagate (STX - Annual Report), and Western Digital (WDC).

By contrast, semiconductors are experiencing the worst pricing on record.

That could be the signal for a contrarian play (I happen to think the worst will soon be over for semiconductors) or possibly just an excuse to avoid the group for a while.

The PPI clued me in to the opportunity in railroads a year before Buffett bought in. I hestitate to bet against him, but it looks like the industry’s price increases have ground to a halt.

If you have the guts, I’d count this as bad news for Burlington Northern (BNI), CSX Corp. (CSX), Norfolk Southern (NSC), and Union Pacific (UNP).

Finally, Wired Telecommunications saw pricing decline for years after the 1996 Telecom Act, but recent consolidation is allowing them to raise prices again.

Winners here would be CenturyTel (CTL), AT&T (T - Annual Report), Verizon (VZ - Annual Report) and Embarq (EQ).

By my count, that is 26 potential stock tips, all courtesy of the U.S. government. I’ll take that over tossing the report any day.

Disclosure: Long Semiconductor HOLDRs (SMH).

After the 1996 Telecom Act, the pricing environment for voice calls - particularly for landline phones, got ugly. Between wireless substitution, competition from cable and competition from other sources such as Skype, the price to make a voice call kept dropping. Until recently.

The ability to raise prices on wired telecom services has done wonders for the stock prices of wired carriers such as AT&T (T - Annual Report), Verizon (VZ - Annual Report), Qwest (Q) and CenturyTel (CTL). But can it continue? For clues I turned to the recent conference calls.

Verizon attributes some pricing gains to its broadband bundle.

Increases in broadband and video revenue, more bundled customers, as well as certain strategic pricing changes all helped drive consumer retail ARPU up $5.64 or nearly 11% year over year. The 3.3% sequential growth in ARPU is primarily broadband and video-related. In Texas the retail ARPU growth was in excess of 20%, and there are several other large markets with double-digit growth including New York, New Jersey and Virginia. We continue to see growth and retention opportunities in the retail consumer market, particularly as we introduced new bundles, many of which will include wireless.

(Excerpt from full VZ conference call transcript)
No wonder they are spending so much on their FiOS buildout.

Qwest is benefiting from having fewer competitors around.

Dick Notebaert

Yeah. Jonathan that’s the model that we have to follow, because we proven we can do the productivity; we have to execute against the marketing opportunity, we have got less competitors, new products. So, yeah, that’s the model that we are executing against. So, yes, we would expect to see margin expansion as we execute and if we execute, which we’ve already got the sales and we just got convert into revenues.

(Excerpt from full Q conference call transcript)

But AT&T sees more cable competition on the horizon.

In small and medium business, the situation there really in the last several quarters in terms of the results and the trends we’re seeing hasn’t changed dramatically. We are continuing to see growth in both voice and data in small and medium business and in our regional business overall. We are continuing to see access line gains and we are seeing relatively low churn rates for both access lines and broadband services.

Where we do have competitive losses and maybe a good way to say this would be if you look at our access line disconnects in the regional business space, most of them are related to technology migration. Only about 30% of access line disconnects are competitive disconnects. In terms of cable competition up to this point of that 30%, the disconnects that are cable related are very small, four to five percentage points of that 30. So we are not seeing a lot in the market at this point, other than probably from Cox who has been in the market for some time. But I do expect over this next year we’ll see more activity as Comcast and Time Warner both begin to roll out their plans.

Again, I think where we will see them will tend to be more in the lower end of the small/medium business space, kind of 10 lines and under, maybe even four lines and under.

Again, so far we are not seeing much impact there. In fact, our small/medium business revenue growth was in the mid 6% range this quarter, about the same as last quarter.

(Excerpt from full T conference call transcript)

As does CenturyTel.

Gaurav Jaitly - UBS

It’s Gaurav Jaitly, UBS. Couple of questions. First, yesterday Citizens mentioned on their call that they were seeing some aggressive promotions in their, rest of the [ph] markets from Charter. Just curious given your relatively large overlap at Charter, if you saw the same… we saw access lines kind of pick up a little bit to 5.2% from just in the 5% in the first quarter.

And then secondly, just wondering if you had any thoughts on the upcoming 700 MHz auctions, if you would consider joining a coalition or just bidding on your own, that would be great, thanks.

Glen F. Post III - Chairman and Chief Executive Officer

Yes, Gaurav, we have seen Charter pick up the promotions in recent weeks and months. And this did have a slight impact because we have access line losses, we do have about 25% overlap with Charter today and… 23% I think overlap with Charter today. And it’s, they’ve been very aggressive, but we don’t see unusual impact. It will be some tough competition, increased competition in some of those areas, but we don’t expect major impacts right now. But they are being more aggressive than they have in the past.

(Excerpt from full CTL conference call transcript)

For investors, it may pay to stick with the companies that are seeing less pressure from competition. In particular, Verizon has taken the biggest steps to stave off future competition rather than merely benefiting from the current lull.

The Economic Calendar is relatively light this week. Potential market movers include:

• Wednesday’s Durable Goods report (consensus 2.2%)
• Friday’s advance report on Q1 GDP (consensus 1.8%)

Earnings are another story. We are in the peak part of earnings season this week. A few of the stocks we follow:

Monday

• Altera (ALTR) - valuation is rich but looks set up to beat on earnings.
• Texas Instruments (TXN - Annual Report) - March and June quarters have both had significant downward revisions. Will day of reckoning be forestalled?

Tuesday

• AU Optronics (AUO) - Forecasting losses, but panel business may have bottomed out.
• CDW Corporation (CDWC) - 14.6% sales growth doable given Berbee acquisition.
• CH Robinson (CHRW - Annual Report) - Could beat.
• CSG Systems (CSGS) - earnings should be a piece of cake. If private equity buyers don’t take them out they’ll do it themselves the slow way.
• Lexmark (LXK) - Estimates are doable but we’re always waiting for this company to trip up.
• ST Microelectronics (STM) - Doing the right thing. Hopefully will pay off.
• AT&T (T - Annual Report) - Estimates and stock both keep rising.

Wednesday

• Apple (AAPL) - Hunch: company will blow away earnings, issue horrible guidance and blame it on iPhone build.
• Arkansas Best (ABFS) - We’re staying away from truckers who own trucks.
• Corning (GLW - Annual Report) - current quarter ok, guidance at risk.
• LSI Logic (LSI) - May blame their poor guidance on Agere.
• Maxim (MXIM) - Company is out of gas but focus will be on whether they might sell out.
• Qualcomm (QCOM) - Nokia Nokia Blah Blah Nokia ad nauseam (excerpt from pending conference call transcript)
• Silicon Laboratories SLAB - Sold wireless just when biggest customer began to recover. What other surprises may be in store?
• UPS (UPS) - They shouldn’t have trouble beating the estimates (but that doesn’t mean they won’t).
• Xilinx (XLNX) - Altera with more risk to the earnings target.

Thursday

• Curtiss Wright (CW - Annual Report) - PPI data suggests they should beat big, but it suggested the same last quarter.
• KLA Tencor (KLAC) - Another place we’d rather not be right now.
• Microsoft (MSFT - Annual Report) - Vista is still not living up to expectations.
• MEMC Electronics (WFR) - Earnings surprises have been getting bigger each quarter. Now that we’ve put a semiconductor name on our Large Cap Watch List (Track at Marketocracy) it will probably stop just to spite us.
• YRC Worldwide (YRCW) - See Arkansas Best.
• Sandisk (SNDK - Annual Report) - Will take more than one quarter to clear the channel inventory.

Friday

• Dassault Systemes (DASTY) - We like Ansys (ANSS) better but don’t see why this name wouldn’t beat.
• Ceradyne (CRDN)  - Earnings could be anywhere and don’t really matter.

Enjoy!

Disclosure: William Trent has a long position in SMH.

In some ways, having a one-letter ticker symbol is considered prestigious - a sign that the company was able to stake an early claim on the stock market real estate. Whether true or not, Federated Department Stores is after one of the few remaining available letters following its planned name change to Macy’s.

M Is Not For Microsoft - Forbes.com

“M” was once thought to be reserved by the New York Stock Exchange for Microsoft (nasdaq: MSFT - news - people ), which is listed on the Nasdaq Composite as “MSFT.”The letter was available, so that made it fair game for Federated, which has traded under the ticker symbol “FD” on the New York Stock Exchange since 1992.

Of the more than 3,100 companies whose stocks trade on the NYSE, the following one-letter symbols are available: G, I, J, L, N, P, U, V, W and Z.

Federated Chief Executive Terry Lundgren made it sound like it’s a positive change in corporate strategy rather than just a sexier, more attractive letter.

“Changing the parent company name to Macy’s Inc.,” Lundgren said in a news release, “while trading our shares under the ‘M’ ticker symbol will make it simple and clear for all investors to understand we are a brand-driven and consumer-oriented company.”

So just how prestigious is the honor? You be the guide as we scroll through the list of existing one-letter tickers. (We promise we are going only by memory - for the CNBC Trivia crowd, have some fun and try to fill in the blanks or catch us out if we are wrong!

A - Agilent

B - ?

C - Citigroup (formerly Chrysler until the Daimler thingy)

D - ?

E - ?

F - Ford

G - Not in use

H - ?

I - Not in use

J - used to be Jackpot, Inc. Were they bought?

K - Kellogg

L - Not in use

M - Soon to be Macy’s

N - Was Inco

O - ?

P - Not in use

Q - Qwest Communications

R - Ryder System

S - Sprint Nextel (used to be Sears)

T - AT&T

U - Not in use

V - Not in use

W - Not in use

X - US Steel
Y - ?
Z - Not in use

So… three telecom companies and a bunch of old line firms. You decide how prestigious it is, and comment below on our shortcomings.

The stock market is purportedly worried by today’s higher than expected producer price inflation headline number, as investors become concerned that Goldilox will burn her lips on some hot porridge. We, on the other hand, take our usual look behind the headline numbers to see which industries are potential winners and losers in the current inflation environment.

Does rising inflation for fruit and vegetable canning suggest it is finally time to buy Del Monte (DLM - Annual Report)?

Price increases in corregated boxes had previously been at odds with bad news from trucking companies. Now it looks like box prices may be rolling over.

Industrial gas prices continue to plummet. Are Air Products (APD) and Praxair (PX) defying gravity?

With aluminum prices rising, will Alcoa (AA) shares follow?

The way industrial valve prices are rising, it is no surprise Curtiss Wright (CW - Annual Report) stock is as well.

Railroads may be running out of steam.

Last but not least, telecom pricing is going through the roof.

Which leads us to ask: why, again, is Verizon getting rid of its lines?

Last month, astute observers (defined as those with a pulse) could notice that there were an awful lot of companies in the wireless food chain announcing disappointing results. Last week Motorola joined the club, and yesterday we got news from the third-largest US wireless carrier. Sprint to Cut 5,000 Jobs; Stock Plunges: Financial News - Yahoo! Finance

Sprint Nextel Corp. reported Monday that its cell phone business suffered a net loss of 300,000 monthly subscribers in the fourth quarter and that the struggling wireless company will cut 5,000 jobs.The company’s stock plunged more than 8 percent after the financial update, which included a 2007 outlook shy of many Wall Street forecasts.

Last month we suggested that several high-multiple names might be worth avoiding. None of those stocks has since blown up, but that doesn’t mean they aren’t standing in a mine field.

As is our custom, we’ll leave the bickering over the headline PPI numbers and their meaning to others. Instead, we present some of the industries that may be seeing better or worse than normal pricing power. (All grey charts courtesy of the Bureau of Labor Statistics.)
First up is corrugated boxes, which are getting more expensive. This is somewhat confusing, as there doesn’t appear to be much demand for them.

The pricing for industrial gases is getting worse (in sharp contrast to the price charts for Air Products (APD) and Praxair (PX).)

Aluminum is getting more expensive.

Prices for industrial valves are rising at the fastest pace ever, which is probably not priced in at Curtiss-Wright (CW - Annual Report).

Computer prices are declining at a slower pace than normal. On the other hand, how much farther can they decline?

Pricing power for the rails is softening - are the stocks next?

Telephone calls are getting more expensive for the first time since the 1996 Telecom Act.

So those were the ones that jumped out at us this month.