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.