The Idearc Fiasco

Well well. Idearc fell to $3.57 on Friday (it is right now slightly above $5 as Barron's published a story on levered equities on the weekend). I had purchased this stock around $28 when it spun out off Verizon and sold it at $35 in August when the credit crunch started. Levered equities are dangerous when credit markets freeze. I also sold AMT at that time.

Is IAR worth a second look? RHD lowered its guidance on Thursday - surprisingly the $100 mn reduction in revenue guidance is almost falling straight to EBITDA and FCF line, indicating a high fixed cost structure for the business.

Negatives are - Economy is slowing, so ad revenues will take a hit + small businesses on whom yellow pages rely will default more in a slow economy leading to higher bad debt expense + Google etc are eating yellow pages lunch + IAR's and RHD's acquisition of domain names for multi-hundred million dollars is not confidence inspiring + IAR's CEO left barely 1 week into his job last week.

Positives are - the company has EBITDA/Interest Expense ratio of nearly 2x, so there is a lot of cushion + Debt/EBITDA ration is nearly 7x which is high, but not 9x of RHD + dividend yield of 23% is mouth-watering - dividend payout is 60% of FCF today. Problem is - if EBITDA declines rapidly, the Debt/EBITDA ratio can suddenly look much worse. Its bonds are trading at a 15% yield, indicating high level of concerns in the debt markets.