Tuesday, November 14, 2006

Stock Pick

RHD Donnelly (RHD) $60

Fellow Investor, I wanted to start with something as close to a no-brainer as possible; this is it. We bought the predecessor Dex Media on its IPO and took stock in the takeover. We have added consistently ever since.

RHD is one of the largest Yellow Pages publishers
in the US. It is a fantastically high margin (44% cash operating profit), high repeat media format. It has two risks. The debt, accumulated over a number of mergers, is over $10 billion on a negative tangible book. Cash interest cover is, however, almost 2:1 and I think this is acceptable given the stability of the business. Secondly, there is a long term obsolescence risk because of the Internet. This is somewhat mitigated as RHD is itself a key provider of local search online; the physical Yellow Pages also likely have many years in them yet. There is a very clever tax structure which allows the massive but utterly unecessary depreciation charge to be deducted from taxable income.

question, as ever, is what you might pay for the cashflow which, on the one hand, may fall off with growing migration online but, on the other, is bound to grow as expensive debt is repaid. Free cashflow will be over $735 million this year.

The market cap is currently $4.2 billion, so the pleasant answer is 5.8 times. This is a steal.

1 comment:

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