Transworld Entertainment Corporation operates a chain of retail stores selling CDs, DVDs, video games and the like. As of January 2010, the company operates over 550 stores (mostly located in malls) totaling over 3.75 million square feet of retail space. The company acquired it’s biggest competitor Musicland in 2006, spending most of the next 4 years closing poorly performing stores and not making any money. Why would I even be looking at this company, considering it’s in a dying business and isn’t making money? We’ll get to that.

Why Is It Cheap?

I barely know even where to begin. As mentioned above, the specialty CD store is a a dying industry. They’re fighting a losing battle against 3 opponents- Amazon, Walmart and downloading (both legal and illegal). The company responded to this change by diversifying into DVDs and video games, with some degree of success, but the company still is bleeding cash. The company has been doing the right thing by closing poorly performing stores, yet every store closure means less revenue.

Industry Outlook

Uhh, were you paying attention above? If you weren’t, let me summarize: crap.

The industry outlook is tricky. Obviously it isn’t that good. Saying that, is there a bottom somewhere? Do CDs eventually go away forever? When is a realistic timetable for that happening? I know people who are in their 20s who still buy CDs and don’t have an Ipod. Sure, those people are in the minority, but there is still a market for CDs. It’s just a matter of figuring out where the bottom is in that market.

Dividend

Non existent. This company is either a turnaround or takeover play, therefore no dividend is expected at any point in the future.

Balance Sheet

Basically the pristine balance sheet is the only reason why the company is being discussed on this blog. The company has a market cap of a hair over 58 million, while the book value checks in at 193 million. That means the company is trading at 30% of book value. The company qualifies as one of Benjamin Graham’s Net-Nets, since current assets minus total liabilities is more than book value.

Considering how anemic earnings have been over the last few years, debt is basically non-existent. Actual debt is just around 2 million, as well as some lease obligations, which is to be expected considering the industry they’re in.

Earnings

2010- (1.28)

2009- (1.89)

2008- (2.56)

2007- 0.03

Yikes. That’s ugly. At least the trend is in the right direction.

According to Yahoo, there are no analysts that cover the stock. My extensive research (read: a 2 minutes Google search) couldn’t find any credible earnings estimates for fiscal 2011.

Insider Activity

I’ve decided to add a new category, focusing on insider buying and selling. For Transworld, the CEO has been buying, however other directors have been selling.

Price Appreciation

Check out this chart from the last 10 years:

As you can see, the company is trading at some pretty low levels. If the company finds a way to turn things around, a recovery to $5-$7 is quite obtainable. I’d set a target price of $6.

Summary

Transworld is an interesting company with a pristine balance sheet that needs a turnaround. While I’m attracted to the balance sheet, I’m not sure how the company is going to improve things. I think the chance of the company getting bought out is virtually none. While I’d put the chances of the company being taken private higher, that’s the only potential catalyst I can see that can really improve the price. I’m going to keep researching this one, but will probably take a pass.

Tell everyone, yo!