By Alex Cutulenco
A company’s stock price can be derived from various different methods of valuation, but it ultimately comes down to what the next investor is willing to pay. In the realms of value investing, however, the price of a stock should represent the fundamental value of its financial performance. If there is a discrepancy between the two, then one might say that the market is inefficient and that investors have misjudged the company. Our analysts at SmallCapPower believe this is precisely the case with a Canadian media company, Yellow Pages Limited (TSX: Y). Yellow Pages does not need an introduction, as the company is fairly well known by the investment community and regular folks in general. Yellow Pages used to be the only available source for you to find a dentist, or reach a supermarket. However, with the addition of several other divisions such as RedFlagDeals and Canada411, the company has successfully diversified its revenue.
Although it might seem like a company on the verge of ending its business practices, it does trade at a ridiculous discount to its fundamental value. With a market cap of $460 million, the company trades at four times its earnings and, more importantly, under its current book value. Although this might seem perfectly normal for a company that is losing traction in sales, it should be pointed out that its net profit margin is at 18% and its EBITDA margin is at a whopping 43%. On top of that, investors have completely beaten up the stock, sending shares down from $25 a share last February, to just over $16 today. Could this mean that the price is severely misjudged by the investment community and you should get your hands on those shares as soon as you can? Absolutely not! In fact, the worst could be yet to come for this stock.
Looking deeper into the company’s financials, we note significant losses in 2011 and 2012 of $2.8 billion and $1.9 billion, respectively. In fact, Yellow Pages has reported these losses primarily because of asset impairment charges of $2.9 billion and $3.3 billion. A quick scan of its current Balance Sheet shows that out of the total asset base of $1.8 billion, $1.3 billion of it is “intangible assets.” It is, therefore, no surprise that the stock is trading below book, because the strength of its assets are close to junk. Moreover, Yellow Pages currently has $662 million worth of debt sitting on its books, and a lackluster $184 million cash balance. From the looks of it, the company will most definitely incur another huge loss on the impairment of the remaining intangible assets, while also failing to keep up with its debt obligations. Oh and have we mentioned how Yellow Pages’ revenue growth has been declining drastically?
As an investor, you should never focus on specific trading criteria, because as in the case of Yellow Pages, the financials representing those ratios/multiples might be completely flawed. As for the stock, a turnaround in strategy does not seem to be on the horizon, as the company has chosen to expand its marketing efforts on the Toronto subway platforms, instead of using that money to restructure the business and focus on productive growth in its RedFlagDeals line of business. That being said, we expect the share price to keep slipping until the yet another well-expected major asset gets written off.
Disclaimer: This article was posted with the permission of a third-party contributor and the opinions contained therein do not necessarily reflect those of SmallCapPower. SmallCapPower does not endorse any investment advice provided by these third-party contributors.
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