Idearc: Cheapest Stock in the Phone Book

This article has 10 comments:

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  Brian Harper

  May 21 06:43 PM

  My Website
  I don't understand the thinking behind buying at a 1.7x P/E and having a target price that represents a 2.5x P/E. If your DCF comes up with that value, it implies that given the leverage, the valuation is very sensitive to the assumptions. Given that the market cap is about $600 mil relative to $9 bil in debt, it leaves little margin for error.
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  Internet
  Analyst

  May 22 12:55 PM

  My Website
  You make a compelling case and Brain's comment is also on the mark in that there is very little margin of error. The better play on this theme however is the growth in local internet advertising. Both IAR and RHD have their print revenues declining far greater than the growth in their internet revenues. While there is little they can do to stem print declines, they can accelerate internet revenue growth through acquisitions. Look at the two pure plays in this field (LOCM & MCHX) to be taken out sooner or later. I am long both because of attractive valuations and takeout potential.
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  ade111

  May 23 06:37 PM
  I think suspending the dividend was prudent. I also think that reducing the company debt load would be prudent. But I also think that IAR needs to start paying a dividend again ASAP. It doesn't have to be as big as before if the company makes it very clear that the difference is being used to pay down debt. But until there is a significant dividend I think we are going to continue to see wild price gyrations and lots of short selling.
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  buyforeclosu
  res

  May 29 01:55 PM
  well its up today and if it keeps going up a squeeze will be sweet! Im watching it like a hawk
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  Brian Harper

  May 30 09:28 AM

  My Website
  I was surprised they completely eliminated the dividend, but I think Harless's insistence on paying it...and her constant marketing of it to investors...was one of the reasons she got axed. If the co could instead engage in some very modest stock buybacks, they could preserve EPS over the long-term. That of course must be approved within their bank covenants. With the debt reductions alone EPS will likely otherwise fall over time, assuming 4-5% annual revenue attrition in the traditional business.
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  Mr Tom

  May 30 10:12 AM
  Benjamin mentions that since most of the companies debt is floating it will benefit from today’s low short term rates without talking about what will happen when rates start to increase. The company’s interest coverage may be fine with the Fed funds rate at 2%, but what does it look like at 5%. The safe way to play this company is through their Sr. notes not there Common as the bond holders will own the company at some point in the future, its just a matter of time, and you get a nice interest payment that the company cannot cut until that time comes. Finally, who buys a company with -8.6 billion in shareholder equity, no CFO and can’t find a permanent CEO give me a break.
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  tucsonbandit

  Jun 01 10:21 AM
  I love stuff like this. This is how to make real money, the risks that people consider 'high', I interpret differently.
  
  For instance, GE is considered a 'safe' stock. (I am getting bullish on GE, but for the purpose of this discussion it is immaterial) GE is diversified so lets, and has a long, long history of growth, good direction and consistent and predictable earnings and dividends. Its market cap is 300 billion or something like that. People are encouraged to dump money in, dollar cost average and not to worry too much about short term fluctuations.
  
  It may shock some then to hear me say that I consider GE to be a very, very risky investment. I consider IAR to be less risky infact, and if one were to buy IAR common, some senior notes and use an an option strategy of selling puts to slowly build shares and then sell calls after long periods of advancements I would say that IAR is the much, much safer play.
  
  Of course they may go BK too, much, much higher chance of going BK than GE..orders of magnitude difference there..but there is another order of magnitude difference, and its the potential reward as compared to the risk.
  
  In the veery, very best case scenario GE can do what? Become the largest company in the present world, and perhaps that would equate to the largest company by market cap in world history. And what would an investor get if they invested today and GE pulled all the right moves and a few years later they did in fact become the most successful (or at least in a certain measure, i.e. market cap) company in the now and in world history?
  
  Well the lucky investor might get a 200% return. Meh. Why do I use that figure? I am just using the market cap of just over 1 trillion, which while not a law of nature by any means as a top for a company, it seems reasonable and fair to say that 1 trillion or there about might be the best GE could realistically ever hope for. I don;t want to argue this point too much, because I am sure people could make good arguments for 2 trillion or 3 or even more, but as of now now company in the world has ever really held a market cap of 1 trillion for any significant amount of time.
  
  I hope I am still right about that and that some china or Indian steel company or oil company has not already made a fool of my words, but I think I am close enough for the purposes of this argument. And know Petrochina may have exceeded 1 trillion, and maybe even got to 1.5, but it did not hold that price. I concede that it is very likely petrochina will pass 1 trillion and stay there, but still 1 trillion is a pretty good description of 'the best a large cap company might genuinely expect to grow to in a very successful business climate'.
  
  Ok, is that enough mealy-mouthed qualifiers for you? So in any event, a home run with GE, a very 'safe' company might see a 200-250% return in 3-8 years at best. With dividends a bit more, and if the climate and expectations of stock ownership changed to expect dividends to be the ultimate investor reward and not pyramiding stock appreciation to dump to some sucker at a higher price, then the risk and rewards I am describing in our current investing climate (which is still slanted way too far to the gambling, multi-level marketing, risky, sleazy, and short term take whatever you can culture of 'investing') would dramatically shift and my argument would no longer be true. But that is a different discussion, and I do hope that in the long run investors wise up and realize a dividend model investment climate is much more sane, more honest, and better for the world, the earth, and our resources than a model that expects infinite growth in a limited resource world. One method rapes the earth, and steals and parasites wealth and work and the very life energy of 99.9% of the worlds population and resources and transfers it to a small elite at the top of a pyramid scam.
  
  A no or slow or smart growth model, where stability and lasting value are shared through dividend payments and intelligent and sane choices about the future will enrich people and the world much more fully than our current system, which can only be described as self-destructive, manic, apocalyptic and even evil.
  
  The more sane or realistic growth model WILL prevail, one way or another. Resisting and going further down the rabbit hole of insanity to try and justify or 'save' our current model will only bring about a situation where change comes due to gigantic and unthinkable catastrophe, which might include anything and everything from global nuclear war, mass die-off and disease, world wide slavery and a new , viscous dark age, technological prison nightmare, drugged and zombiefied hoards of the unwashed (all of us, except for some elite 1%) who exist only to do manuel labor, as sex slaves, as some horrible form of entertainment or torture or even bred for our organs, skins or food...imagine people DNA mixed with chicken, so we become large humanoids that taste like juicy chicken for our masters...
  
  Ok, I am losing my mind here now...back to the topic at hand..lol...
  
  My main point is that in the best case scenario, the 'safe' stock GE might return 150-300%, but as we have seen now in 2000, early this year and all during the last decade 'safe stocks' do seem to have trouble growing once they get to about 250 billion (see MSFT, CSCO, GOOG, etc..), but so called 'safe stocks' can and do correct 50%, 80% or even more. Examples include Nortel, MSFT, GE, ATT, SUN, MO, F, Airlines, MBI, FNM, FRE, C, BSC, and many, many more.
  
  So when you weigh a possible 200% gain against the real risk the risk/reward is just out of balance IMO. Large compnaies represent HUGE risk in my view. They have a long way to fall, many people who will want to sell and protect huge profits (so the selling pressure is built in by definition of their success), are large and vulnerable to hungry and flexible start-ups. They have huge targets on their backs from rivals, disruptive business and tech, and even governments going after them because they represent an entity with money..any number of things can be drawn up against such huge companies..even lawyers and employees see reason to target or scam them. All this risk, for a possible 200% gain.
  
  OTHO, companies that have been killed, left for dead, destroyed, laughed at, sold off, forgot about etc...they are the real safe stocks IMO. All the negatives of being popular and in the spotlight and a known rich entity are reversed. people ignore you, let their guard down, cut you breaks, etc...no more sellers, everybody who sold has done so..that means the entire investing population represents potential buyers....any trigger can send the stock up hundreds of % in a few years....smart business men like buffett eye these as turnaround plays, government may offer handouts and aid, and on
  and on...
  
  sure you may go BK, and you may lose 80% or something..but so can any stock. But the real kicker here is that, depending on what sector, a true beaten down loser that is a true turnaround play can turn $1000 bucks into millions. Even only a semi-successful attempt might turn $1000 into 12,000 or something. hell, due to the small market caps, a rumor can get you better gains than a perfectly executed 7 year plan in GE.
  
  The resistance to growth is just gone, the only thing left is good news or BK. Bad news becomes expected, the stock either does not react at all, or will even soar because greedy bears are still trying to short and the bad news causes one to cover and triggers a buying panic....
  
  The key is to do good research, invest in secotrs that are in bull markets, but in a company that maybe had some misfortune or bad management, or even crooked management, but which is now seemingly on the right track. These are good because their sectors are seeing lots of investment money, people feel bullish about the sector, and the company likely has built in value or resources that were never realized because of bad management or just bad luck.
  
  It seems odd, but sometimes bad management and stupid business moves can create a situation where a stock is set to just explode upwards. This is especially true in the resource stock sectors, like gold, where there truly is gold in the ground, but because of stupidity, bad luck, or even local country and political risk the profits have never been realized. These are actually very bullish situations, because the gold or oil or if it is timber trees are still THERE, and they are growing more valuable while management diddles or argues or countries war...in effect, such situations create massive leverage.
  
  And so these are the type of things I look for. Because of the leverage and potential one need not invest much money to get a good return. Even a rumor can suddenly give you a 100% gain. A good method is to take some early profit and try to get it so that the money that remains invested is 'the house' money after you have taken out initial investment and maybe a little profit.
  
  It just makes sense to invest this way so much more than the 'dry', uncreative way explained in most dull books. not only is it dull, but they think they are being conservative or offering conservative advice, but in reality they are offering much, much more risk with much smaller potential reward. Far too many people equate a dull stock with a low beta with 'safety' , but low volatility does not equate to 'high safety', no matter how many ways they try and explain it as such. Low beta just means your flight or fight response is not being triggered as hard, but it has nothing at all to do with return on investment.
  
  The only thing I can think of as to why I sometimes like low beta stocks is that when I write options sometimes I might feel safe investing the money that the options I wrote may require me to spend in the future ( depending on the outcome of the options of course) in a low beta stock (with a nice dividend hopefully!) to try and squeeze a little more juice out of options writing during the waiting period between contracts.
  
  Back to the investing in small screw ups...some success stories I have had so far include the following:
  
  WMB finance.yahoo.com/q/bc...=
  
  William companies, bought it at under 2 dollars I believe, sold WAY too soon, at $8-9 :(
  
  Argentina stocks in 2002, various gold and silver stocks, AMD, SNDK, other storage companies etc, etc..
  
  sorry for rambling on..but the basic idea is this
  
  risk/reward=? really risk does NOT vary that much in any stock compared to the reward side of the equation...the most risk can ever be is 100%..one can even use that figure every time for ease of use and just to be 'on the safe side....
  
  so lets say risk always=100, so then try and figure out reward...
  
  on a big stock like GE it will be like 200-400% so you might get a number like 100/300 or 1/3. The smaller the number, the less risk IMO, or you can see it as the most reward..same thing really..
  
  even if you assume GE risk # more like 70% or you are super bullish and think GE could NEVER fall more than 50% ( a foolish stance IMO, but even so, it strengthens my argument, not weakens it) then you might get a number like 50/300 or 1/6.
  
  What about a stock like AMD? ok..even 1 year ago it was at 40 or more, recently it was at about 5.....so lets say over the next few years AMD does really well and gets back to its all time high as its investment in ATI pays off...so, risk here is 100%..., if it went back to 40, the reward side would be 800 for a total of 1/8th...better than GE.
  
  How about a stock in the oil sector,a refinery, WNR. Last summer WNR was at 60, I bought it last week for 8. its in a sector i like, and since I have large gains in energy stocks refinery plays can offer a sort of hedge while my other energy stocks might correct. I also think that even if oil does not correct much, refineries will recover and learn how to better survive and run in this new environment...this is a perfect type play for me (and for diversification I invested in a number of refinery plays in case one or two happen to go BK)
  
  Anyway for WNR the risk number came in for me at 100/750 or 1/7.5. Anyway, I think everyone gets the picture. I will await the flames and insults and to hear about the flaws in my logic. I am sure I made many errors, as I wrote this off the cuff and it is generally poorly organized and disjointed..but I am too tired and lazy to edit it..hope it makes sense to at least a few people..yes, I will be buying IAR and their competitor RHD or whatever the hell they are called..
  
  peace..
  
  the ADHD investor
•  
  Brian Harper

  Jun 02 04:10 PM

  My Website
  $1.9 bil of their $9 bil in debt is floating...$4.4 bil of their tranche B loan is swapped to fixed at 7.57%, you have to read a footnote to find that, but the major majority is fixed. The decline in libor will shave about $57 mil in annual interest expense between 3Q07 and now. That's about a 25 cent/share annual benefit to EPS.
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  prawn

  Jun 23 03:26 PM
  well that convinced me not to buy.
  Any company that can't pick a CEO that'll stay more than 8 days....(and then all the rest of it!)....and what kind of golden 'chute did the 8-day wonder get - I wonder, h'mmmm?
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  RichardSpahr

  Aug 29 03:45 PM

  My Website
  If you really want to know what is going on at Idearc and why they are destined to mediocrity and worse, look at my blog and see if you can sense my intense aversion. I worked there and can only say that I loved the people I worked with and had nothing but supreme contempt for those I worked for. www.veridearc.blogspot...