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Through The Fly's Eyes: The Yellow Pages
From Catherine Horner of Theflyonthewall.com
Yellow Pages or Web Pages?
Yellow-page publishers R.H. Donnelley Corp. (RHD) and Idearc Inc. (IAR) are on Wall Street's best seller list as stock prices for both companies continue to soar. The share price of Donnelley, publisher of AT&T (T), Dex (DEX) and Embarq (EQ) yellow pages is up more than 40% this year, closing at $76.70 yesterday, while Idearc, publisher of Verizon (VZ) yellow pages, is up more than 30% this year and closed at $35.97 yesterday. Analysts and hedge funds are positive about these companies due in large part to the cash flow they generate. Donnelley trades at about a 13% free-cash-flow yield and Idearc trades at around 10% yield, both much higher than the average 6% yield of large media companies. In Donnelley's case, strong cash flow is aided by tax exemption due to amortization of the cost of past acquisitions which will keep the company carefree on April 15th for approximately the next 10 years.
However, the current vitality of both companies could be threatened by online competitors. Although Donnelley and Idearc have established Internet counterparts, they remain small fries in the world of superpower search engines Google (GOOG) and Yahoo (YHOO). Donnelley's dexknows.com generates less than 2% of the company's total revenue and Idearc's superpages.com generates about 9%. To make matters more difficult for the yellow-page publishers, Google and Yahoo are now allying with newspapers to create localized search engines which, according to Sidoti & Co. analyst Richard Tullo in a statement to The Wall Street Journal, "means added competition for directory operators." Tullo is not the only one predicting a bleak future for the yellow-pages: Bill Gates has predicted that "yellow-page usage amongst people... below 50 will drop to near zero over the next five years." In addition to their Internet struggles, both companies are facing heavy debt: Donnelley is forecast to owe $9.4B at the end of 2007, almost double the company's market value of $5.4B, while Idearc will face around $8.6B of debt according to reports in The Wall Street Journal.
Yet, despite all the red, some bullish analysts see a possibility for growth, focusing on the companies' large sales forces and long-term relationships with businesses. In fact, despite its nationwide mediocrity, dexknows.com is the top local-business search engine in 14 Western states. And despite the intimidating presence of Internet big-wigs, many analysts feel that yellow-page companies stand to benefit from the shift online. Anthony DiClemente of Lehman Brothers Inc. declared in a recent WSJ report that "They're beneficiaries of the shift online because directory companies own the relationship with small businesses. Will Joe's pluming company have the technological awareness to go to Google? Probably not." However, if Google succeeds in recent efforts to improve its small business appeal, that edge may get dull quickly.
As of right now, it is difficult to tell where the major yellow-page publisher’s tale will go from here. Donnelley is successfully paying off its debt, reducing interest costs and improving its cash flow. However, in the 1Q the company also experienced a 2% fall in advertising sales form 2006 when overall ad sales fell about 2%. So, while stock prices may be rocketing, you can't judge a book by it's big, yellow cover and these companies could be much less healthy than they appear.
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Theflyonthewall.blog
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