Is it any wonder, with titles that clever, that my blog is at least the 642nd most popular in the whole finance blogosphere?
Yellow Media is the owner of Canada’s yellow pages, that big thick book that our parents use to look up business info. Since their main business has suffered greatly in the past decade, the company has diversified into all sorts of internet media, including sites like 411.ca, Canpages, Red Flag Deals, and formerly Auto Trader, which was recently sold. Is the diversification into online businesses enough to offset the slow death of the crown jewel?
Why Is It Cheap?
Investors have been predicting the downfall of Yellow Media for at least 5 years now. Who uses the yellow pages anymore? Businesses are realizing that spending money to get in the yellow pages isn’t increasing business, so why bother? Revenue and profit have been staying somewhat steady over the past few years, mostly because of heavy borrowing to buy other online businesses.
Just a quick glance at the income statement shows a company that’s paying out a dividend higher than earnings. This usually doesn’t end well.
Before we get started, let me share with you this gem of a quote from Yellow’s CEO Marc Tellier:
The Yellow Pages brand has been waiting over 100 years for digital.
Are you serious? Yellow Pages is the ultimate of the old crusty brands. Does he honestly expect anyone to believe that BS?
Okay, obviously the yellow pages themselves are a dog. What about the rest of the businesses? Revenue was basically flat from 2009 to 2010, yet online revenue was up 16%. That’s solid growth for the online businesses, but doesn’t translate to good results for the whole company.
This is the only saving grace for shareholders. The company currently pays a monthly distribution of over 5 cents a month, which translates into over a 20% annual dividend at the current share price. Even though the stock has gotten hammered over the past 5 years, the dividend has saved investors from further pain. So the company has that going for it, I guess.
Going forward, the company pays out more than it makes. The stock fell 18% in one day back in June, as an analyst issued a scathing report about the future (or lack thereof) of the dividend. This observer has but one comment: “well, duh.”
Normally I tend to look at just tangible assets, (that is, assets that aren’t goodwill or intangible assets) since I like assets that can be sold off if needed. Because Yellow Media is pretty much all intangible assets, it makes almost no sense to figure out book value. How do we know that the intangible assets are worth what the company says?
If you figure out book value including all the intangible assets, you get a value of $10.63, which is a pretty sweet premium over the closing price of $2.69. Too bad that number is pretty much useless.
Now the good news. The company has actually figured out they have a debt problem. They have $2.5B worth of debt, plus another $775M in preferred shares. This doesn’t look too bad against $5.5B worth of equity, until you realize the equity is pretty much entirely made up of intangible assets.
The company raised $745M from their sale of Trader Media. This will be applied to debt. That is good.
Yikes. That trend is uglier than the aftermath of a Vancouver hockey game. Just for fun, let’s look at the dividend the company has paid over the same period.
Now that’s just good planning. No, wait, good isn’t the right word.
(In their defense, EBITDA wasn’t nearly as bad as earnings, since they had a lot of non-cash charges. EBITDA is much more important to an income trust than net earnings, so this wasn’t that big of a deal. Also, I realize a full 92% of you have no idea what the hell I’m talking about.)
I have finally found a site to use for insider transactions on Canadian companies. It’s called SEDI, and it’s pretty annoying to figure out for the first time.
Anyway, SEDI told me that insider buying has been a little weak. More directors are selling than buying, but one did take on a nice 75,000 share position a few months back. So at least someone is a believer!
Unfortunately for everyone, all I can get is a one year chart because of the conversion from an income trust to a corporation. The share price has dropped from over $6 to the current levels of below $3. Before that, the company spent lots of time trading above $10. There’s plenty of room on the upside.
I see more pain in the short term for Yellow’s shareholders. Whenever there’s a sniff of uncertainty around the dividend, the stock gets hammered. The company continues to pay out more than it earns, which usually doesn’t end well. When the company finally comes to their senses and cuts the dividend drastically, (or eliminates it completely) you won’t want to be anywhere near this one.
They are taking steps in the right direction. Online revenues are growing, bringing profits along for the ride. Margins aren’t nearly as good as the directory business, but at least the online division is profitable. Using the proceeds from the Trader Media sale will help with the company’s debtload, which needs to be cut.
Like with every contrarian company, this one needs some sort of catalyst to spring things forward. I can’t see anything but more slow declines for the phone book part of the business, and I have no idea how the company can change public or investor sentiment.
It might be so beaten down that any bit of good news will result in a nice pop in the share price. After all, the company is still profitable. It currently trades at only 5.7 times last year’s earnings. If they keep taking steps in the right direction, it could be a good buy. I’m content to hold it on my watch list for now.
Disclosure: I don’t have a position in YLO and don’t have plans to buy any within the next 72 hours.