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, Barel Karsan (431 clicks)
Long only, deep value, contrarian
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SuperMedia (SPMD) trades for just $35 million despite a cash balance of $180 million! The company has also been cash flow positive for years, having pulled in a total of about $1.25 billion in free cash flow over the last four years. The main problem the company faces is its debt level, which sits at over $2.1 billion.

SuperMedia is a yellow pages publisher, which means it's getting its lunch eaten by online advertisers such as Google (NASDAQ:GOOG). However, just because a company's industry is in secular decline doesn't mean it can't make for a good stock investment. If the stock price is low enough, even an industry with poor prospects can generate enough cash to make an investment worthwhile (two recent examples: here and here).

But it does mean an understanding of the business' fixed costs is of the utmost importance. When sales decline, different companies have varying abilities to cut costs commensurate with the lower level of revenues. SuperMedia has shown the ability to cut its costs over the last few years such that it remains profitable.

There is one looming exception, however: its debt level. Though a company can cut SG&A and COGS with innovation and belt-tightening, shrinking the business only makes debt levels larger in relative terms. SuperMedia has a lot of debt to pay off before equity holders are likely to see a dime. With business conditions in this industry deteriorating (as customers migrate to higher ROI online services), it's unclear whether the company will have enough time to shrink its debt before business conditions render this impossible.

To understand an investment's risk, the investor must accurately gauge the level to which a company is saddled with fixed costs. While many costs can be slashed at will, debt obligations cannot be. High debt levels combined with a deteriorating business environment often result in a risky situation.

Disclosure: No position

Source: SuperMedia: The Fixed Cost That Won't Go Away