R.H. Donnelley: An Attractive Bet for High-Risk Investors- Barron's

R.H. Donnelley (RHD), the second-largest independent yellow-pages publisher, has seen its stock fall to $2.00 in 2008, a 94% drop over the last eight months. The company has been hit by weakened demand for advertising and a heavy $9.7B debt load leftover from the company's history of growth-through-acquisition. Despite this, Barron's sees Donnelley as an attractive stock, albeit a risky one.

First the bad news: Donnelley has seen its market value drop from $4.8B a year ago to under $150M, and about 24M shares have been sold short out of nearly 70M shares outstanding. Nor is Donnelley alone. Investors that once counted on yellow-pages publishers as stable, high-margin companies have seen weakened ad demand and an increase in internet searches erode both market share and profitability for these one-time cash cows. Rival Idearc (IAR) has seen shares drop 92% this year to $1.30.

Not all the news is bad, however. Donnelley is still profitable, forestalling investor fears that it is heading to bankruptcy court. Its debt load will not begin to mature until 2010, giving the company a two-year runway to get its act together. Donnelley is also generating $500M in annual free cash flow, uncommon for a company with a market value of less than $150M. CEO David Swanson says yellow pages are much healthier than newspapers, with a wide base of 600,000 advertisers, and that the current downturn reflects the slumping economy and not a move away from print yellow pages.

There is some talk among investors that the best next step for Donnelley is some combination of a stock buyback to reassure shareholders and a bond repurchase to help reduce its financial leverage. Management says it is considering the latter. In the long run, Donnelley's success is contingent on reversing advertising declines, maintaining cash flow, and convincing investors that print yellow pages are not doomed. In the short term, however, the stock may bounce back simply because people keep using the yellow pages and with at least two more years before debt loads sink the company, this could make Donnelley a $2 bet worth taking.

Comments

[lucky lenny:]

not to mention that anytime i need a plumber, CPA, lawyer, etc... i reach for the yellow pages - i think the yellow pages are still the most cost-effective form of advertising & aren't going away anytime soon - also - RHD's debt load has been coming down - though it's still very high

2008 Aug 17 08:41 AM

[fatcat:]

This would be a $15 stock if the debt were,lets say,1.5bl...they have a good business. Kind of like a couple making 120k a year,but they have a mcmansion and 2 suvs and 2 kids in college...it does not compute..

2008 Aug 17 10:51 AM

[E Nuff Sed:]

The shareholders can get wiped out in a hurry. I will want to see significant insider activity before I would want to get in.

2008 Aug 17 12:39 PM

[ksmithdc:]

Print advertising is extremely expensive. As a small business owner, I have to work within a tight budget. And like all other small business owners, I want my dollar to stretch as far as it will go. For my industry, yellow pages advertising is a complete waste of money. We've tested all kinds of ads in all kinds of directories. And it's never a good return on investment. What does work, and what is 1000 times more cost effective is internet advertising. The internet is what's killing the yellow pages. Perhaps the days of the YP is dwindling (just as the horse & buggy went by the wayside when the new technology known as the automobile showed up).

2008 Aug 17 02:47 PM

[littercritter:]

just for grins i am going to buy 20,000 shares on Monday to squeeze the shorts. you know it will happen because it was in Barron's. it will be free money. hahahahahaha!!!!!!

2008 Aug 17 04:50 PM

[william:]

I like iar and think it is a better value and the article in Barron's actually via the charts indicate this!

another cheap stock-- awrcf.ob-- asian infrastructure play - rev $510 million and net of .35, bk value over$10.00/sh ( doesn't include land and buildings updates), cash/sh $3.75, 13.8 million shares outstanding- Michael Dell's fund owns 20%, PSR=.08, 60% below book, trading near cash value-- nasdaq listing coming soon according to management--
awrcf.ob---$3.75 cheap stock in the world-- check out the f-20 filings

2008 Aug 17 11:40 PM

[jetski:]

My brother in law, a plastic surgeon, gets most of his business from the yellow pages. His patients are mostly 20 somethings seeking nose jobs, facial resculpturing and breast augmentation. He has tried internet advertising. It does not work for him. He also said he gets calls from older yellow page ads that have been out there a few years.

2008 Aug 20 01:05 PM

[you_can_cal...:]

User, your comment is thought provoking. I'm curious as to how he knows calls are coming from old ads. My natural assumption is that he can't know unless he stopped using YP, but continued to see responses. If so, did he tell you why he quit using them (and has he resumed)? If not, how did he figure this out.

Thanks in advance.

2008 Aug 21 05:32 PM

[I Know It:]

Most YP companies can set up call tracking for advertisers. This enables the advertiser to know the calls were generated by the YP ad - even down to which book consumers are using.
Or - the doc may do it the old fashion way. He may ask his Admin Asst. to simply ask the caller, "How did you find us?" Then they simply keep a tally of which type of advertising generates the most ads. It is not that difficult to do and most smart business owners will do this.

2008 Aug 29 02:52 PM

[Judy:]

The SEC finally eliminated naked shorts today. Note the upward pressure. If the uptick rule is finally reinstated this stock can reach a normal level. The shorts who do not cover will BURN!

2008 Sep 18 12:01 PM