SuperMedia: Unparalleled Value and Unique Turnaround Play in One


Although my field of expertise is mostly in the biotech arena I think I have come across such a unique value play that it is worth sharing here on Seeking Alpha.

SuperMedia (SPMD) owns the old Verizon (NYSE:VZ) yellow pages. The company went chapter 11 last year not because they were unprofitable (they showed a profit every quarter they were public) but because VZ loaded them down with over 9 billion dollars in debt when they spun the company off in 2006.

The company emerged from Chapter 11 on Jan 6th. After the restructuring the company's debt was reduced from around $9 billion in debt to only $2.75 billion. Shares outstanding went from over 150 million to only 15 million. All the new shares went to bond holders. The famed hedge fund Paulson and company owns 17.4% of the shares outstanding.

What makes the SuperMedia story so extraordinary is this. Because the company eliminated so much debt, annual interest payments should only be about $240 million this year. That is down from pre chapter 11 levels of around $700 million. Based on SEC filings for the first three quarters of the year, the company will have operating earnings this year of about $750 million. I am going to assume that operating earnings decline by 10% this year. So that would put operating earnings at $675 million. Deduct $240 million for interest gets you to $435 million deduct 1/3 for taxes gets you to $300 million in earnings. Divide that by 15 million shares outstanding and EPS could be as high as $20 per share. Which would make the stock trading here at 40 only 2 times earnings.

Although the base business is slowing due to encroachment from the Internet, an improving economy, more focus on customer satisfaction through the company's new super guarantee program (they will pay you back if not satisfied with a contact made from a yellow pages listing) and a restructuring (close to 30% of the work force has been laid off over the last two years) should help keep earnings near last year's levels. In fact last week the CEO told Reuters that he is seeing stabilization in the core business:

We're starting to see some improvements in retention rates for clients... and we're seeing our clients and our potential clients more willing to engage.

Over the last year the company has also spent heavily in technology to help customer satisfaction and worker productivity.

SuperMedia is also having some success with new businesses launched last year including SuperTradeExchange, which is a business to business bartering platform. They also provide web site design, web hosting and search engine optimization for customers looking to expand on the internet.

The company also expects to grow the Internet business as well. SuperMedia owns and I expect the use of the mobile apps of Goggle's (NASDAQ:GOOG) android platform, Blackberry, and the iPhone to drive revenue growth

As far as the stock is concerned, volume is starting to pick up as the stock crosses $40 (opened on the first day at $35). As with CIT and LEA, both of whom emerged from bankruptcy in December, the stock is showing a similar patten. All three stocks started trading slowly and then picked up after a few days, I think that bodes well for SuperMedia going forward.

Though SuperMedia will never be a great growth story, it might be both a good turnaround speculation and an insanely cheap value play trading at around 2X earnings. If the company delivers on earnings and the multiple goes to a P/E ratio of 7 the stock would trade 100 points higher than it is today.

Disclosure: Long SPMD

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