# Yellow Media (Y.CN)



## Janus (Oct 23, 2013)

Anyone else invested in this one? I've recently made a sizable investment into its common shares. The company is trading at a valuation that practically implies that it will go bankrupt (2 times cash flow) - something that seems almost impossible if you look at cash flow generation. The company has reached a stable point in its business in which it can ride out the decline in print revenues while ramping up digital. In short I think we're past the danger zone - and once the market picks up on that (likely in 12-18 months) we should see some serious capital appreciation.


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## kcowan (Jul 1, 2010)

I would consider it highly speculative. They tried to buy their way into online by acquiring The Auto Trader family. All of their improvements to that set of sites were disasters. So they unloaded them at a considerable loss. This is one that I would watch and see if it gains momentum. Otherwise it is dead money.


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## HaroldCrump (Jun 10, 2009)

I still hold one of their pre-bankruptcy bonds, re-structured in 2012 into a series of secured notes and a small number of convertible debentures.
It is a very small holding for me, so I am not worried about it.
I basically treat it as a cash position, which I can liquidate easily any time I need cash to buy something else urgently.

However, I'd say the common shares are pure speculation, akin to a penny stock.
This company has been notorious for poor management, outstandingly bad decisions, and greedy behavior by executives.
Play it by all means, if you like, but only as a speculative penny stock.


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## Janus (Oct 23, 2013)

kcowan said:


> I would consider it highly speculative. They tried to buy their way into online by acquiring The Auto Trader family. All of their improvements to that set of sites were disasters. So they unloaded them at a considerable loss. This is one that I would watch and see if it gains momentum. Otherwise it is dead money.


It's speculative in the sense that if they screw up the transition, one can lose their money on this - so a "speculative level of risk". But it's not speculative in the more general sense that the individuals and hedge funds who are investing in this have generally done a ton of research on it and it's a massively contrarian trade. I consider chasing netflix to be speculation, not doing weeks of cash flow analysis on a universally hated stock to see how realistically they will make their way out of debt.


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## larry81 (Nov 22, 2010)

Just try to remind yourself when you last used the Yellow Pages and if you want to invest in a business in direct competition with Google...

I think you be more interested in horse-drawn carriage repair business.


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## Janus (Oct 23, 2013)

It's not a question of them becoming a leader in digital media. It's a matter of them reducing their debt burden, institutional investors being able to buy again, etc. 

Nobody thinks this company wil ever be dominant. But even returning to a low-normal valuation means more than a doubling of the stock price.


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## kcowan (Jul 1, 2010)

We live in an apartment building (150 units) and they deliver around 40 books to the lobby. After three days, 25 are put into the recycle bins. I am willing to bet that Yellow is counting all 40 as being in circulation...


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## Janus (Oct 23, 2013)

Irrespective of what's happening in your apartment, they are explicitly planning on letting that business' revenue going to zero. They are well aware that the business is doomed, but rather than shut it down they're letting it contribute to earnings (while shrinking) while they transition to digital revenues.


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## BlackThursday (Apr 25, 2011)

Janus said:


> It's not a question of them becoming a leader in digital media. It's a matter of them reducing their debt burden, institutional investors being able to buy again


Is it just a debt burden that's holding them back? Do you see a sustainable business model here?


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## doctrine (Sep 30, 2011)

EPS down to $1.43 from $1.91. Revenue down, print revenue down 23% year over year. Digital revenue up 5%. The problem I have is that they aren't trading at a discount - they aren't really a huge bargain. Book value is $20.60 a share. If you take away their print business, they are going to have a hard time coming up with $20M/quarter in interest, unless they can get their rates down. Lots of risk and I would avoid, especially since you should be getting a 25-50% discount to book, but that easy money has been made. My best projections is that they could be trading at a P/E of 10-15 of their digital business, but they have the debt from the print business dragging them down and they could be at barely 2 times interest coverage (they are at 3.7 times now). A downturn in digital advertising rates would sink them fast - that is the real risk here.

Perhaps worth a gamble at $10-12 a share they were trading at last year, but not at or with a premium to book. Otherwise, I'd wait until the bleeding on EPS stops and the company stabilizes out, perhaps with lower interest payments. I doubt a company like this could trade at a sky high P/E so there will be plenty of opportunity in the future, especially if bad news strikes.


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## HaroldCrump (Jun 10, 2009)

doctrine said:


> Book value is $20.60 a share.


Virtually all of their non current assets is goodwill.
On a per share basis, it works out to about $46 apiece.
Anyone considering buying should look deeper into exactly what that goodwill comprises of - patents, sole agreements, etc.
There is nothing else in the company other than that one line item.


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## doctrine (Sep 30, 2011)

They have $1.3M in intangible assets vs a net book value of $585M. If they wrote off 50% of the intangibles in a downturn, shareholders would be wiped out.


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## larry81 (Nov 22, 2010)

YPG "Digital strategy" is really just:

1. selling cookie cutter websites to mom and pop shops
2. Google adwords
3. SEO


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## Janus (Oct 23, 2013)

doctrine said:


> EPS down to $1.43 from $1.91. Revenue down, print revenue down 23% year over year. Digital revenue up 5%. The problem I have is that they aren't trading at a discount - they aren't really a huge bargain.


They're trading at less than 2 times free fash flow - that *is* a bargain.


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## HaroldCrump (Jun 10, 2009)

Janus said:


> They're trading at less than 2 times free fash flow - that *is* a bargain.


Where are you seeing that?
Their FCF in 2014 Q1 was -ve.
2013 Q4 FCF was $74M, which makes their market cap about 7.5x times FCF.
It does not sound like a screaming bargain, unless these numbers are wrong.


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## Janus (Oct 23, 2013)

HaroldCrump said:


> Where are you seeing that?
> Their FCF in 2014 Q1 was -ve.
> 2013 Q4 FCF was $74M, which makes their market cap about 7.5x times FCF.
> It does not sound like a screaming bargain, unless these numbers are wrong.


I'm using a bloomberg terminal, it's giving me 1.68. Are you dividing market cap by quarterly cash flow? You need to use a trailing 12 month cash flow.


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## Janus (Oct 23, 2013)

Thought I'd revive this thread. A few updates on yellow media:

- Print still falling 23% year over year (as expected by both management and investors)
- Digital revenues growing high single digits - digital is now 52% of their business
- Debt load becoming more and more manageable every quarter
- Stock up 34% in the last 30 days.

I've built a financial model for Yellow Media, and have looked at some different scenarios:

- Assuming digital revenue never grows again and print falls 25% a year, the stock is worth roughly its current price on a discounted cash flow basis.
- Assuming 5% digital revenue growth and print falls 25% a year, the stock has ~40% upside
- assuming 7% digital revenue growth and print falls 25% a year, the stock has ~60% upside

This is all a rough exercise - the main thing I've learned from building financial models is not to rely on them to produce a single estimate of value. Their main utility is in stretching one's assumptions to look at extremely bearish downside conditions. But when a stock has no downside in a shrinking business scenario, that tells you something.

As for the most recent quarter, digital operational data was very encouraging. Big pickup in users, and they're ahead of schedule on client acquisition numbers.


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