by Travis Johnson, Stock Gumshoe | November 24, 2010 3:55 pm
Every year, on the day before Thanksgiving, I like to dig through the year’s teasers and try to pick one “favorite” as the Turkey of the Year — sometimes the worst performing pick, sometimes the most ridiculous, sometimes just one that stands out in some other silly or unfortunate way.
Last year the Turkey was our old friend Raser Technologies, touted by many and now loved by few — it will be tough to top that, a stock that was heavily touted, in a “hot” sector, and that fell so dramatically both before and after achieving “turkey” status. Raser was was a highyflying alternative energy stock for a while, reaching $15 less than three years ago and getting teased and touted all the way down to $2 or $3 … it got our Turkey prize last year at about $1.25, and is now delisted and trading for less than 20 cents (it’s at RZTI now over the counter, if you’re curious — and no, I don’t think being named the Turkey of the Year did anything to hasten that fall, they managed to do that just fine on their own).
So I doubt we’ll see a story that’s as fun or a stock that’s as gravity-bound this time around, but who, pray tell, will be named the Turkey of the Year for 2010? Remember, the only rule is that the stock has to have been teased since last Thanksgiving … and it has to be some kind of a stinker for one reason or another.
We could always pick on one of the miners that bucked the trend of increasing commodity prices to sink like a stone, like Mosquito Consolidated Gold Mines (a molybdenum play, despite the name) or Explor Resources, but I hesitate to pick junior miners (though I have before) just because we all know that many of them are one bad month away from failure, no matter how they’re teased (and I was never quite 100% sure of that Explor ID, anyway).
And I’ll admit, I was half-tempted to pick Powersave Energy, which got a lot of play over the winter but still seems just plain silly (that was the pitch for a “Negawatt Box” that cuts your electric bill) — that is, after all, the worst overall performer this year of the teaser picks, down 84% since it was touted in January (that’s notable in itself — it’s somewhat rare, in my limited experience, to have a year with no stocks that went bankrupt or dropped by 99%).
Or we could pile on to the problems with some Chinese or Greek stocks — several Chinese firms, including some that I own, took a tumble over the last twelve months, including some that seemed well-suited with a great “story” for meeting Chinese market demand, like Duoyuan Global Water and Rino International fighting pollution or Scientific Games modernizing Chinese lotteries. I was real tempted to nominate those three, to tell you the truth, but I resisted.
And I think we all know quite well that, so far at least, the Motley Fool’s bet (at which they weren’t alone, of course) on a bottom in Greece didn’t work out well, with National Bank of Greece and the Football Prognostics gambling firm among the decliners on my spreadsheet — I don’t know if the Global Gains crew are still recommending these or other Greek stocks after they’ve fallen (GOFPY is down only 20% or so, NBG was cut in half), but according to a recent disclaimer I read the Fool itself owns NBG shares now.
That Motley Fool piece was clearly speculative, though, it talked fairly honestly about the risks and was worded as a way to make an “armageddon trade” along the lines of the huge success John Paulson had in betting against US real estate and mortgages. So what really caught my eye was another John Paulson-derived idea that I covered far more recently.
So this year, the Stock Gumshoe Turkey of the Year is … drumroll please …
Yes, I added the exclamation point.
Supermedia breaks the still fairly new mold of the Turkey of the Year, and reminds us all that Stock Gumshoe is a totalitarian regime where traditions change at the whim of the absolute ruler — SPMD was not super-aggressively hyped by more than one newsletter that I’ve seen, and in fact it was teased by a pretty short set of hints in an ad that also teased other picks.
And it hasn’t been around for that long as a teaser (or as a public company, for that matter), but the brief pitch of the teaser and the implication that you could profit along with John Paulson in being wise investors who go against the herd, tied in with truly remarkably bad short-term performance for all shareholders, including Paulson, gives the nod, ever so slightly to SPMD this year.
Not that Paulson’s probably too worried, his firm owns 2.6 million shares — which sounds like a lot, but means that even at the far higher price of $40 or so nine months ago it was still probably not in his firm’s top 40 holdings. That holding hasn’t changed over the last three reported quarters, so the value, assuming he still holds it today, has dropped from about $100 million to about $15 million. Losing $85 million on paper is unfathomable for me, but probably pretty commonplace for him.
The credit for calling this Turkey to our attention goes to Hilary Kramer, who teased what sounded an awful lot like SuperMedia to us as part of an ad she ran in September. To be fair, she focused more on Tesla, which has been up dramatically despite my skepticism, and on Applied Materials as a solar play, which has also been up slightly, so I won’t call Kramer a turkey — just SuperMedia.
If you aren’t familiar with SuperMedia, you’re not alone — they own the pretty popular SuperPages.com directory search site (that’s a top 300 site in the US, according to Alexa … about 20,000 slots ahead of StockGumshoe.com, I am forced to admit), and they publish the Verizon-branded version of the yellow pages. They were most recently known as Idearc after being spun off by Verizon a few years back, at a time when it was a hugely cash-generative business and a high-yield stock and Verizon was able to get away with saddling the newly independent company with a truly remarkable amount of debt. They spent a couple of years in bankruptcy watch as income-focused investors held onto the shares because of the high dividend, but it eventually became too much and it was clear that the bondholders were owed far more cash than the company could generate, so they did go into bankruptcy back in the Spring of 2009.
As part of their bankruptcy reorganization, John Paulson’s funds came in to finance their restart in the fall of 2009, and they came out of bankruptcy on December 31 of last year with a debt load that was cut by about 70% (from $9 billion+ to what is now, as of the last quarter, just about $2.5 billion — they also have $300 million in cash on the books). The former creditors, including Paulson, ended up with all of the equity in the new company, which was renamed SuperMedia, and the stock began trading in January at the new ticker SPMD. The stock was initially listed at about $40 and got as high as $48 in May, but came back to earth pretty quick — if Kramer had touted the shares in the $40s I might be tempted to call her a turkey, too, but she didn’t tease it for us until it was down to about $11 in late September, still pretty high for the stock but certainly more reasonable than $40. The stock today is under $6, so a remarkable fall from grace and a very quick 40%+ drop even just since late September when I wrote about them for Kramer’s teaser.
And they’re not alone — the other major US yellow pages publisher that’s independent (AT&T still publishes on their own, apparently) is the former RH Donnelley, which also went bankrupt at about the same time and emerged from bankruptcy in February of this year, also with a new name and ticker — they’re now called Dex One (DEXO), and they’re saddled with a comparable amount of debt and have seen essentially the same collapse in the price of their new shares since they returned to the public markets this past Winter (from $35 to $5+, in DEXO’s case).
So … SPMD has clearly been a turkey this year. Does that mean it’s going bankrupt again, or that it’s not worth investing in at these beaten down prices? Well, that’s a question that every investor has to ask themselves.
I think I’ve made my pessimistic opinion pretty clear — I think the only reason to invest in a significantly declining business is if you’re getting the majority of the cash flow, and you think that the business will remain a going concern long enough to pay you back with that cash flow (usually in the form of dividends). Since there seems to me to be a limited chance for the online advertising business to grow quickly enough (at lower margins) to offset the declining but hugely profitable print directory yellow pages business, I think of the yellow pages businesses as being kind of like a depleting natural resource trust — will you get your money back and make a profit before the revenue dips low enough that they can’t pay their creditors? Given the competitive and price-sensitive online advertising space compared to the monopoly or oligolopoly of yellow pages directories in a given reason, and the decline in print yellow pages usage that I think is probably going to be significantly more dramatic than the publishers and their associations believe, I don’t like their odds. It’s not necessarily good news that their top highlight in the third quarter report is that they have cut the rate of decline in revenues.
That said, clearly intelligent folks can differ in opinion on this — and there are those who feel that the stock is dirt cheap right here (I don’t have any idea what Hilary Kramer’s current opinion is). There’s a pretty compelling argument against my pessimism by a writer at Seeking Alpha, for example, who thinks the stock is 50% undervalued (roughly) based on his most conservative assumptions.
There are also some good things happening at SuperMedia — they are negotiating for the right to stop printing the white pages directories, which would be a relatively minor cost savings but still notable. And they’re talking to creditors and trying to get the right to buy back some of their debt at market prices, which, assuming they can afford it, would be a good thing. They have pretty strict rules about how much principal they have to repay every quarter out of their income, and they’ve been doing that so far, but the debt is priced at about 80 cents on the dollar so if they can retire it early (it matures in about five years) that would help cash flow.
And it’s also true that the GAAP numbers they’re reporting this year are not comparable with past or future years because of the “start over” impact of the bankruptcy, so there are hundreds of millions of dollars in non-cash items that cut their recognized revenue and earnings but won’t recur. They don’t appear to be in any trouble as regards paying their debt service right now, so I’m not worried that there’s a big imminent risk of bankruptcy — but a second bankruptcy is, of course, certainly possible down the road someday, especially if they can’t stop the 15-20% drops in revenue that they’ve seen over the last two years. I’m inclined to guess that the business will slowly die down and become a shell of it’s former glory over the next ten years, just as it has done over the last ten years — SPMD and Idearc have never shown a year-over-year increase in revenues (that’s since 2001), but I think the revenue decline will accelerate in the decade to come.
The way I read their latest announcement, they are seeing adjusted EBITDA come in at a pace of roughly $600 million/year if you adjust for the non-recurring adjustment of some state tax stuff, and from that probably at least $300 million has to be paid in interest and amortization on the debt (the interest alone would be $275 million on $2.5 billion in debt at 11%, though I could be off on the interest rate, but they have to pay down principal if the cash flow supports it — which it currently does). That sounds impressive for a company with an $84 million market cap, and maybe it is.
They’ve been improving the rate of decline in advertising revenue, so guessing how SPMD will perform in the future requires guessing what the rate of revenue drops will be in future years (or you can believe that revenue will climb if you wish, of course) … and what their margins might be as they continue cutting costs. After several years of cost-cutting and what appears to me to be a continuing move of revenue from higher-margin and higher-rate directory sales to lower-margin (usually) online advertising, I have a hard time imagining that they will materially improve their margins from here … though anything is possible, of course.
And it’s also true that there could be some corporate events in the near future that give SuperMedia more of an opportunity to cut costs as revenues decline — with the most likely probably being a merger with Dex One (the new CEO at SuperMedia, who came out of retirement to be interim CEO, worked at Dex One predecessor R.H. Donnelley for many years). And they are certainly trying to cut costs and streamline the business, and bring in new partnerships — they have a cross-listing partnership with Dex One, and a similar kind of agreement with Local.com, both of which might help them attract more business.
I think the debt currently on the books is at a minimum of 11% interest, so it’s not inexpensive (I read that the rate is LIBOR + 8 with an 11% minimum, so if rates go up their costs will, too — and of course, if rates go up materially, their customers, mostly small local businesses, will suffer).
The debt doesn’t appear to be available to individual investors, and I can’t find much info about it except from the company, or a trading price for it in any of the usual places, but they reported that the current value was about 80% of principal in their last 10-Q, which would mean that the effective yield is about 14% even if you don’t assume that you get the 25% bonus when maturity hits. So I must confess that I think the SuperMedia debt is probably a lot more attractive than the equity — especially since the debt covenants require principal repayments along the way and a pretty steep percentage of free cash flow (something like 2/3) to be repaid to creditors.
So that’s really what it comes down to for me, still — it’s been a serious turkey of a stock this year, and there were a lot of folks interested in it at $40 when it came public because the numbers looked so impressive, trading at just a couple times EBITDA … but still, revenue and earnings are falling.
I still can’t see a good reason to buy a stock with overwhelming debt and declining revenue unless the company pays me a lot to hold it, and there probably won’t be dividends from SuperMedia for quite a while, if ever — it is worth noting that since there is about $2.3 billion in net debt on the books and only about $84 million in shareholder value (market cap), this has to be a company run by and for the benefit of the creditors. The stockholders have already, again, lost almost their entire investment (yes, including John Paulson and the last round of creditors who inherited this equity — even though his effective cost was certainly far lower than the $40 SPMD traded at earlier this year). I might be willing to lend them money, but I don’t want to own the company.
And yes, it’s more fun to poke fun at stinkers than it is to crow about successful teaser picks — after all, the newsletter copywriters are plenty good at bragging about riches attained, they don’t need any help from us. But in the interest of fairness, I should note that this has actually been an unusually good year for teaser picks — credit goes to a climbing market, of course, but there have been about a dozen stocks that have doubled (or nearly doubled) after they were teased in the first nine months of this year. Most of them, as you can imagine, were commodity related, including huge winners like Silver Wheaton and Petro Matad, you can see the tracking spreadsheet here if you want to catch up on some of the other teaser picks of 2010, both good and bad.
Thanks for another great year of Turkeys, folks! We’ll be back after the holiday weekend with more Gumshoe fun and the start on our next 200 or so Turkey of the Year candidates for 2011 (and hopefully some money-makers, too). If you’ve got another favorite from the past year to nominate as a Turkey, or if you’ve any thoughts or opinions to share about SuperMedia and their chances going forward, please share by using the friendly little comment box below. Thanks, and have a wonderful Thanksgiving break (even if you’re one of the valued Gumshoe readers from overseas, at least you’ll be getting a break from my blather for a couple days — enjoy!).
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