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yellow pages income trust(ylo.un)


finetrader
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I have been looking at ths stock, and would like to get opinions from this board.

 

It looks cheap at first sight with p/FCF=8, after deducting 30% of FCF that they are gonne pay in income tax beginnning in 2011.

 

I am concerned over the moat around the directory business though. With the internet, more people(including myself) look for a business phone number with search engine (ex:google).

 

Numbers don't yet show erosions in profitability but would like to have opinions from other inverstors.

 

 

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I reviewed the Yellow Pages a few weeks ago and I rejected the purchase because of too much goodwill.

If you take out the Goodwill you'll see quite a drop in the book value of the company.Also, not enough return on equity and in my opinion, they have headwinds, and their growth opportunities are not organic.

 

One of the reaction that managements has when being confronted with headwinds and decreasing revenues is to start acquiring non core business to maintain the boat floating. This increases the risk big time and stops me from doing a good valuation on the long term.

 

The return is quite good tough but I'd rather have the possibility of steady income. Maybe short term with a 1-2 years outlook but then... that brings you directly to 2011 where the tax laws will be effective. Some people will argue that the tax laws are already discounted off the price but I expect a nice reaction from the general public when they realize impact. I'm VERY cautions when it comes to trusts.

 

BeerBaron

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It looks cheap at first sight with p/FCF=8, after deducting 30% of FCF that they are gonne pay in income tax beginnning in 2011.

 

 

Still too expensive for my tastes.  When you say "p/FCF=8" what it really means to me is that YLO would have to pay out every penny of its FCF for the next 8 years as dividends just to get my money back.  I'm not convinced that YLO will still be around for 8 years, and I seriously doubt that it will be able to maintain its free cash flow at current levels.  The assets strike me as basically worthless from a liquidation perspective.  I just cannot see how a prospective investor could buy-and-hold this without a permanent loss of capital.

 

Are there any active shareholders here who can offer a thesis for owning this?

 

SJ

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I would second the comments above.  This is a cigar butt at a cigarillo price.

 

Depending on cash flow, indebtedness, and good management, buggy whip businesses can be great--Blue chip stamps comes to mind or even BRK itself. But mediocre capital allocators in that kind of business is a killer.  If you give me a barge pole, I promise not to touch it!

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This is a classic cigar butt business. It is cheap by my definition ,the bear case on this co is pretty entrenched and widespread the bear case is not that different from the newspaper arguement which I would not touch with even a borrowed barge pole. It is certain that what ever is delivered on your doorstep a decade from now will be much smaller than todays version of the Yellow Pages. The companies mgmt however does not appear to be entirely brain dead the much slower than I expected decline in traditional revenues has been mostly offset with revenues from online sources. Their moat in Canada is pretty wide and Google for whom they currently are selling ad words I see as their real competition. It is interesting that the stock jumped at the same time as they announced an IPHONE app for the Yellow pages. Frankly the best of all worlds would be a Google take-over. Similar cos in the US are bancrupt or soon to be but that is more a function of agressive capital structure (too much leverage) FD I am long tho not as much as I was 2 weeks ago. I suspect the reason that revenues have been surprisingly sticky in their traditional business because many small business owners still find value for money in their directory spend.

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I also hear this argument about how "paper" is on the way out; and maybe it is, but I personally am a tech person, who has access to computers and online search applications almost 24/7, and yet I, still use the traditional Yellow Pages for many things.  Don't get me wrong, finding a specific entry is fast online (and incidentally, I use YLO's), but if I want to quickly sweep through say, a bunch of Pizza places, I can do that in the Yellow Pages Book a 1000 times faster then online - why, because they have the menus in the book; whereas online, I have to visit each bloody site and then find said menus (which in some cases is almost impossible). 

 

I also tend to find that the older generation, those over fifty, on average, are more prone to check the book than online because it generally is faster for them to navigate something they've done a million times rather than head to the computer, turn it on, wait for the OS to load, start the web app, click the URL, read the page, enter the information, and hope that they get what they wanted because if they've used google they may still get several million sites that have nothing to do what they're looking for in which case they get frustrated, turn off the computer and go for the book :)  Next time around - you know what they're going to do.

 

Furthermore, back to the pizza example, I find it ironic that I prefer that method because I don't get inundated with stupid cross advertisements popping up trying to sell pimple creams or how one stock a month is all I really need :)

 

 

 

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I also hear this argument about how "paper" is on the way out; and maybe it is, but I personally am a tech person, who has access to computers and online search applications almost 24/7, and yet I, still use the traditional Yellow Pages for many things.  Don't get me wrong, finding a specific entry is fast online (and incidentally, I use YLO's), but if I want to quickly sweep through say, a bunch of Pizza places, I can do that in the Yellow Pages Book a 1000 times faster then online - why, because they have the menus in the book; whereas online, I have to visit each bloody site and then find said menus (which in some cases is almost impossible). 

 

In 5 years this information will all be on google. menus too.

 

The paper Yellow Pages is useful if you are stuck in a hotel room with no web enabled cell phone or no computer but usually I am looking for highly targeted local results.  For instance: all the greek or italian restaurants within 10 blocks of my location. Google maps makes this visual and instantaneous. I haven't used yellow pages since about 2005. 

 

I also tend to find that the older generation, those over fifty, on average, are more prone to check the book than online because it generally is faster for them to navigate something they've done a million times rather than head to the computer, turn it on, wait for the OS to load, start the web app, click the URL, read the page, enter the information, and hope that they get what they wanted because if they've used google they may still get several million sites that have nothing to do what they're looking for in which case they get frustrated, turn off the computer and go for the book :)  Next time around - you know what they're going to do.

 

Furthermore, back to the pizza example, I find it ironic that I prefer that method because I don't get inundated with stupid cross advertisements popping up trying to sell pimple creams or how one stock a month is all I really need :)

 

 

Most computers these days support sleep functions and can wake up within a few seconds. People leave them running in this low power state all day, instead of turning them completely off and on (which, I'll admit, is slow).  In ten years web-enabled cell phones will be the rule rather than the exception, and you will speak your search query into your phone instead of typing it. The technology is already developed.  It just needs to be refined and trickle down to the majority of users.

 

In ten years, most of the people who are now over 50 will then be over 60. They will be using the net just as much as everyone else to keep up to date with photos and video calls with their grandkids. They will get dragged onto the tech bandwagon whether they want to or not.  I predict that more people in this age group become very tech savvy, and they will use computers for a lot more than they have in the past.

 

In summary, I don't have a lot of hope for YLO as a long term investment.  At some price even a declining business will be attractive but I think the online offering of YLO is going to be absolutely destroyed by Google, Yahoo, MSFT, and other as-of-yet-unborn tech companies which will find ways of mining all that data automatically, and presenting it in a much more useful fashion.

 

This won't happen overnight, and not everyone will use online instead of paper--but I think that only a minority will use YLO official online offering and a small and shrinking minority will use paper copy YP.

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For the past few years several companies in Anchorage have been trying to start their own phone books. One company, GCI has  (from nothing) has become the number one dominant carrier, by a large percentage, the other large phone company who used to be number one and now is CS, the third phone book is an outfit out of Salt lake City and their book always has a ram on the cover.  ACS has the real yellow pages.

My unscientific observations of the books used in our small office building:

All three bring enough books for  all the phones plus some in the building.  I take most of the GCI and Ram books to recycling an no one seems to want them.  I take the older ACS books to recycling as everyone seems to keep them, including myself.  I believe that this is what a well known investor calls a moat.

I don't use the internet for phone numbers , because I just don't think of it (different generation).  The numbers I call regularly are in my cell phone.

 

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"In 5 years this information will all be on google. menus too. "

 

As I said before, the information is already on the web, it's just a matter of collating it and presenting it in a fashion that allows for quick casual browsing.  It might exist in google now but the effort needed to find it and present it in a fashion that allows for me to quick-scan will probably not be there in 5 years and /or it will take too long to set-up. 

The only point I'm making is that there is more uses to the paper version than just looking up a specific number and I believe that peoples predictions of its demise are generally optimistic.  Remember the idea of the paperless office 20 years ago - funny - I still see lots of paper.

 

"Most computers these days support sleep functions and can wake up within a few seconds."

 

Really?  I've been in the software field for a quarter of a century and didn't know that; I usually shut my computer off with the power breakers :) 

But budget consicous pensioners know that sleep mode still consumes vast amounts of power and since they use the device so rarely, they shut them down.

 

"In ten years, most of the people ... and you will speak your search query into your phone instead of typing it. ..."

 

I understand this argument, I heard it 15 years ago with respect to typing things into a computer (Dragon software, etc); that really didn't pan out at all.  For the most part, after 15 years of research and development; I think they have about a 90% accuracy rate.  No one in there right mind is going to use that system knowing ahead of time that they are going to have to manually correct 1 in 10 words.  I foresee very little progress in the next 10 years due to the complexity of the problem.

 

I do agree though that eventually, the paper versions will ultimately be a rare commodity and that the long-term prospects of the business will require rethinking.  On the other hand - I still have a phone land line and they were supposed to have dissappeared 5 years ago as well :)

 

 

 

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nelis,

 

You may well be right.  I guess we will have to revisit this in 5 or 10 years and see.

 

Speech recognition is much harder to do when the input is any word from the OED or random acronyms (for instance a technical manual).  However, when you are only looking for businesses or attractions in your neighbourhood you have a much smaller known dictionary to match against with higher weightings.  Their are lots of smart engineers seeking such shortcuts to make these things work well. (consider dictionary size for predictive text input on cell phones).  I agree that we won't be using our phones to dictate and (speech to text) complex documents for a while yet, but great improvements have been made. Last year I tried out the speech recognition module that comes for free with Office 2003. After voice training it for 5 minutes it was already giving me accuracy far higher than 90%. 

 

PC system sleep has obviously been around for a long time. My point is that ACPI sleep and hibernate functions actually WORK on most computers now... without totally crashing when you try to wake it up (as was common with PCs in the past 12 or 13 years).  Improvements in hard disk access speed and introduction of solid state drives significantly improves PC wake-up times.  This may be old hat to you.. but I think a lot of people aren't aware of this.  They will realize it in the next 5 years and it will change the way people use their computers.  it will become a much more spontaneous interaction. Easier than, for instance, pulling a book out of a drawer.

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