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T-bone1
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I've tried to normalize SPMD's financials to remove the effects of fresh start accounting, which are very significant right now.  Because they sell advertising, print books, and pay sales commissions 3-6 months ahead of actually delivering the book and recording the revenue, they have a lot of deferred revenue and expenses which they recognize over the course of the year. All of this was written off and converted to goodwill at the end of 2009, effectively turning $500 million in operating income that would have hit in 2010 into a $500 Million goodwill entry. My estimate of adjusted/normalized 2010 earnings is:

 

revenue of $2,090

operating expenses of $1,508

operating income of $582

interest expense of $275

earnings before taxes of $307

taxes of $111 (I assume they pay at 36%)

Net Income of $196 for the year . . . or $12.67 per share

 

I am long the stock and it is trading at $13.10 today. Obviously the stock price has a lot to do with the leverage, but they currently have $300 Million in cash and are throwing off a fair amount of cash to pay down debt (which is expensive at 11%), so interest cost will fall.  They paid off $177 Million of debt in the first half of this year, but some of this cash was generated from working capital

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I've tried to normalize SPMD's financials to remove the effects of fresh start accounting, which are very significant right now.  Because they sell advertising, print books, and pay sales commissions 3-6 months ahead of actually delivering the book and recording the revenue, they have a lot of deferred revenue and expenses which they recognize over the course of the year. All of this was written off and converted to goodwill at the end of 2009, effectively turning $500 million in operating income that would have hit in 2010 into a $500 Million goodwill entry. My estimate of adjusted/normalized 2010 earnings is:

 

revenue of $2,090

operating expenses of $1,508

operating income of $582

interest expense of $275

earnings before taxes of $307

taxes of $111 (I assume they pay at 36%)

Net Income of $196 for the year . . . or $12.67 per share

 

I am long the stock and it is trading at $13.10 today. Obviously the stock price has a lot to do with the leverage, but they currently have $300 Million in cash and are throwing off a fair amount of cash to pay down debt (which is expensive at 11%), so interest cost will fall.  They paid off $177 Million of debt in the first half of this year, but some of this cash was generated from working capital

 

 

Any legacy costs like pensions?  How much is their debt, and what are the terms and duration?

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T-Bone, don't you think you are looking at it the wrong way? Instead of focusing on cash flow you should focus 1st on liquidation value and then on the cash flow. From looking at it real quick I see in SPSD might be worth -1.7B$ in asset liquidation value. So If you were to buy the whole business your real profit point would start to be once you paid all the debt + your purchase price (200M$). For the course of making it simple let's assume your pivot profit point is 2B$.

 

Now from this value you can check if SPSD it's worth anything. Project you cash flows under pessimistics assumptions and see if you get an acceptable risk/reward.

 

I would use 3 scenarios

 

Projection from past scenario

(8% Declining Revenues + 4% Declining Costs)

 

Bad times scenario

(12% declining revenue + 3% Declining costs)

 

Life suck scenario

(16% declining revenue + 2% Declining costs)

 

If scenario 3 returns 10% and more you might have a plausible investment if you believe management will accept to die and distribute profits.

 

BeerBaron

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Any legacy costs like pensions?  How much is their debt, and what are the terms and duration?

 

almost $300 Million in unfunded pension liability. I have too look up what assumptions they are doing.

 

the debt is term loan at LIBOR + 800 with a 300 floor (11%) that comes due in 2015 - it was their exit financing.

 

There is a mandatory cash sweep of 2/3 of FCF that must be used to pay down debt (which they would do anyways).

 

I think they are holding the $300 in cash right now because next year they should be allowed to purchase their debt at market rather than par, its trading at 80% of par I believe.

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T-Bone, don't you think you are looking at it the wrong way? Instead of focusing on cash flow you should focus 1st on liquidation value and then on the cash flow. From looking at it real quick I see in SPSD might be worth -1.7B$ in asset liquidation value. So If you were to buy the whole business your real profit point would start to be once you paid all the debt + your purchase price (200M$). For the course of making it simple let's assume your pivot profit point is 2B$.

 

Now from this value you can check if SPSD it's worth anything. Project you cash flows under pessimistics assumptions and see if you get an acceptable risk/reward.

 

 

I'm not sure where you are getting this liquidation value from. Their assets are mostly goodwill, so it can only be valued on cashflow.

 

Their "customers" are the businesses that advertise with them, and I think this is unlikely to keep declining at the rate of the last few years. They have a great value proposition, and the customers that have stuck around are likely to stay . . . i.e. they know who they are advertising to (old people, whoever else still uses the yellow pages).

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T-Bone, don't you think you are looking at it the wrong way? Instead of focusing on cash flow you should focus 1st on liquidation value and then on the cash flow. From looking at it real quick I see in SPSD might be worth -1.7B$ in asset liquidation value. So If you were to buy the whole business your real profit point would start to be once you paid all the debt + your purchase price (200M$). For the course of making it simple let's assume your pivot profit point is 2B$.

 

Now from this value you can check if SPSD it's worth anything. Project you cash flows under pessimistics assumptions and see if you get an acceptable risk/reward.

 

 

I'm not sure where you are getting this liquidation value from. Their assets are mostly goodwill, so it can only be valued on cashflow.

 

Their "customers" are the businesses that advertise with them, and I think this is unlikely to keep declining at the rate of the last few years. They have a great value proposition, and the customers that have stuck around are likely to stay . . . i.e. they know who they are advertising to (old people, whoever else still uses the yellow pages).

 

Exactly, there is no liquidation value. I got the 2B$ from putting the Goodwill value at 0 (Assets=1554 Liabilities=3284 Shareholder Deficit=1700). 1700 SHDeficit+200Purchase Price =1.9B. Rounded it up to 2B to make it easier to count.

I still kept the intangible at par, but putting intangible at 0 would be an even more accurate/proper analisys.

 

So if you were the owner of SPMD you would have to pay back all the SH Deficit before you would get return on your 200M investment right? The leftovers are what's left for you. Meaning that your business will need to earn 2B$ before you get a real profit.

 

I used the last 4 years to determine their revenue and expense decline. You can use different assumptions but don't be too optimistic, especially on the expense side. There are some incompressible expenses and that can destroy FCF pretty fast.

 

BeerBaron

 

 

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I think putting the goodwill to 0 is extreme given the FCF the company is throwing off.  I think a more realistic alterntive is to perform a declining DCF analysis as T-bone describes with conservative assumptions.  Once you determine when the decline rate rate will approach 5 to 15% a year like Earthlink and USMO you can apply a 2.5x FCF multiple to it (the current mutliples for Earthlink and USMO).  The key questions is when will that occur.  Historcially, SPMD has been able to increase FCF as revenue has declined but this can only go so far.  The additional complication is the debt.  In essance, this a LEAP on SPMD's declining FCF.  I have had a hard time in estimating when the steady state decline will begin.  I did look at management's incentives (in 10-K) and they are incentivized on EBITDA and revenue not FCF.

 

Packer

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I think its important to note that SPMD provides a great value proposition to their customers - a much better return on their advertising dollars than almost any other form of advertising.

 

USMO and ELNK (which I own) provide crappy services (pagers and dial-up internet) to their customers at inflated prices. Their customers really only use them because they are lazy or dumb. Some portion of their "customers" don't use them at all, they just haven't bothered to cancel their contracts.

 

SPMD will be around as long as their are yellow pages - and the online superpages.com is a growth area with great economics. I agree that it doesn't pay to be overly optimistic, but I think its worth noting that FCF could potentially increase, or at least flatten out for 10-15 years.

 

If you pay USMO or ELNK this year, you are a sucker and you should quit, die, change your credit card, or stop living in the past.

 

If you pay SPMD this year, you are a lawyer, plumber, restaurant, auto-body shop etc. that is reaching valuable local customers who are looking for your service. You are very likely to remain a client next year and the year after. etc.

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Packer, you are probably right in using only FCF. But then my question to you is: If I were to buy the whole business for 200M$ when can I expect to see back my Principal+Interests?

 

If goodwill is not worth 0 then what is it worth? What will it be worth if FCF turns negative?

 

BeerBaron

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Beerbaron,

 

for practical purposes the goodwill doesn't have value, its just a placeholder . . . a guess at the discounted cash flows that SPMD will be able to make due to their market position, customer and consumer relationships, etc.

 

The value of the goodwill is the answer to the FCF question, not a starting point.

 

 

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USMO and ELNK (which I own) provide crappy services (pagers and dial-up internet) to their customers at inflated prices. Their customers really only use them because they are lazy or dumb. Some portion of their "customers" don't use them at all, they just haven't bothered to cancel their contracts.

...

If you pay USMO or ELNK this year, you are a sucker and you should quit, die, change your credit card, or stop living in the past.

I disagree in regards to pagers. Pagers are a niche that's still used heavily, and by companies that are on a leading edge of technology. For example, almost every software engineer, tech manager, and so on up the chain at Amazon.com carries a pager. Not to mention doctors and others who have to participate in 24/7 "on-call" rotations as part of their job. Cell phones just don't work very well in those situations.

 

As far as Yellow Pages, I haven't used it in a very long time. Like everyone else, I get a heavy tome of Yellow Pages delivered to my door every year, and I throw it straight into recycling. There's Yelp.com that, in my opinion, trumps anything physical or even online Yellow Pages can offer, not to mention Google+Google Maps combo.

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Turar, what is the advantage to a pager over just getting a text message? don't these people all have cell phones?

 

As far as the yellow pages, I don't use them either (although I do occasionally use superpages.com). The point is, we are not their customers . . . the advertisers are.  The advertisers know they aren't going to reach you and me.  They will reach old people, and a smattering of others, but what they all have in common is that everyone who looks up plumber (or lawyer, or pizza, etc.) in the yellow pages is litterally about to buy that product. This makes it a very cost effective form of advertising, albeit to an older audience.

 

The advertisers know who they are reaching. And as the SPMD's of the world are able to start printing up less books their costs will decline.

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Turar, what is the advantage to a pager over just getting a text message? don't these people all have cell phones?

I think it comes down to being able to wake up at 3am from a cell phone text message, that usually just beeps a couple of times and stops. Or hearing it in a crowded bar or something. I'm sure there are options on some cell phones that can make it beep loudly and continuously until a button is pressed when a text message arrives, but not all, and probably not most phones. More importantly, most people wouldn't bother to figure out how to set it up, even high-tech geeks, when there's a standard solution offered organization-wide, that will definitely wake you up at 3am. (And yes, I can confirm from my own experiences that those little pagers make you jump from bed at 3am!)

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  • 2 months later...

SPMD down to $6.35 and DEXO down to $6.85.  SPMD came out of BK at $35 in January 2010 and DEXO came out of BK at $31 in Feb 2010.  

 

These were probably terminal shorts rather than cheap stocks.  Yellow pages really do have no future and these companies should have been liquidated.  

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Guest HarryLong

I've tried to normalize SPMD's financials to remove the effects of fresh start accounting, which are very significant right now.  Because they sell advertising, print books, and pay sales commissions 3-6 months ahead of actually delivering the book and recording the revenue, they have a lot of deferred revenue and expenses which they recognize over the course of the year. All of this was written off and converted to goodwill at the end of 2009, effectively turning $500 million in operating income that would have hit in 2010 into a $500 Million goodwill entry. My estimate of adjusted/normalized 2010 earnings is:

 

revenue of $2,090

operating expenses of $1,508

operating income of $582

interest expense of $275

earnings before taxes of $307

taxes of $111 (I assume they pay at 36%)

Net Income of $196 for the year . . . or $12.67 per share

 

I am long the stock and it is trading at $13.10 today. Obviously the stock price has a lot to do with the leverage, but they currently have $300 Million in cash and are throwing off a fair amount of cash to pay down debt (which is expensive at 11%), so interest cost will fall.  They paid off $177 Million of debt in the first half of this year, but some of this cash was generated from working capital

 

 

What is your cost basis? When you first wrote it was $13.10. And today, it just hit a 52 week low at $6.20. Is the real take-away lesson here about the fundamentals of this company, or again, is it about risk control and admitting when you're wrong and limiting losses?

 

I think SPMD is a story about using proper risk control.

 

Also, how do you compare the EV/EBITDA against something like SURW, or LNET? From a fundamental valuation standpoint, I'm not sure what your thesis is, if you're trying to run a portfolio with an optimal valuation.

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What is your cost basis? When you first wrote it was $13.10. And today, it just hit a 52 week low at $6.20. Is the real take-away lesson here about the fundamentals of this company, or again, is it about risk control and admitting when you're wrong and limiting losses?

 

I think the real lesson is about fundamentals of the company.  There are lessons about risk control/admitting when you're wrong, but this isn't a good example of that.

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