The Idearc Fiasco: Stock Worth a Second Look?

Well, well. Idearc (NYSE: IAR) fell to $3.57 on Friday (it is right now slightly above $5 as Barron's published a story on levered equities on the weekend). I had purchased this stock around $28 when it spun out off Verizon and sold it at $35 in August when the credit crunch started. Levered equities are dangerous when credit markets freeze. I also sold AMT at that time.

Is IAR worth a second look? RHD lowered its guidance on Thursday - surprisingly, the $100 million reduction in revenue guidance is almost falling straight to EBITDA and FCF lines, indicating a high fixed cost structure for the business.

Negatives: The economy is slowing, so ad revenues will take a hit and small businesses on whom yellow pages rely will default more, leading to higher bad debt expense. Google etc. are eating yellow pages' lunch. IAR's and RHD's acquisition of domain names for multi-hundred million dollars is not confidence inspiring. IAR's CEO left barely one week into his job last week.

Positives: The company has EBITDA/Interest Expense ratio of nearly 2x, so there is a lot of cushion. Debt/EBITDA ratio is nearly 7x, which is high, but not 9x of RHD. Dividend yield of 23% is mouth-watering - dividend payout is 60% of FCF today. Problem is, if EBITDA declines rapidly, the Debt/EBITDA ratio can suddenly look much worse. Its bonds are trading at a 15% yield, indicating high level of concerns in the debt markets.

Comments

[valueinvestor123]

As a teacher of mine once told me "You have a good grasp of the obvious" Do you want to do any analysis and offer up an opinion? I don't own either of these companies as the business models seem to be relics of the past.

[Aram]

I have recently sent two emails to IAR asking them to comment on some of the recent occurrences in their company and some questions about future dividends. They have seen fit to not respond to my emails. That is not good customer relations in my opinion.
If they could not legally make any comment, then they could have at least responded indicating that.

[JohnD]

The fundamental issue here is they are a cashflow monster that can manage short term expenses (payroll/overhead for the most part) with reduced advertising revenue and maintain a stable cash flow picture. With revenue falling about 2% a year, not considering short term economic fluctuations, they could continue their dividend level for the next 7-8 years along with a payout ratio of under 60%, pay their mandatory $12m debt reduction @ quarter, and buyback some of their stock to improve their EPS. The problem and concern is that they will try to be something they certainly fail at, migrate quickly (and at great capital cost) to a technology company (Superpages & the like). That would eliminate all excess cash after they pay the mandatory quarterly debt reduction. This scary story is further enhanced by insensitive [to the analyst community] statements from the original CEO and the recently departed Chair and acting CEO saying "more of the same, our last years capital spending strategy will be maintained, we will continue looking into M&A and grow our web-based directory business". These guys don't realize they are the furthest thing from a Google, they are all ex-phone guys. Get with the program ! Tell the world you will optimize your monsterous cash flow, cut expenses, and stop investing in M&A and organic web-based directory service. Use the cash to buy back the stock at a 50% return on capital, talk to the people who hold the debt covenants requiring $12 million a quarter payback (anyone/lender with half a brain would agree that buying stock with a 50% return on capital is more worthwhile than retiring debt that cost 6 or 8%). That will drive the stock, bring health to the company's fiscal situation and all Idearc to go buy someone for equity when their stock is back in the $18-22 range. Hello. - John D.

[Tampajoe]

They have around 9 $billion of debt. I found about $3billion of listed bonds. Does anyone know the terms of the balance of the debit? Where did this debit come from? Was it part of the spin off? What does it cost to service it? They did not answer my email either but referred me to the transfer agent.

[jason Jones]

Does anyone think this company will go out of business soon with those stock prices?