The market (that in capitalist theory it is supposed to be “rational”) is mostly composed of lemmings. Look at some local media stocks, and you’ll see it. Our friends at A.H. Belo, for example: They own three major newspapers with revenues of about $550 million and net cash flow of around $93 million. Yet the market values the company’s total worth at around $122 million. (I bet their downtown real estate is worth that.) Or Idearc, the yellow pages spinoff from Verizon. Its revenues are $3.1 billion (with a “b”). Free cash flow is $257 million. Yet the market values it at around $256 million. If you and I borrowed $256 million today, bought the company, paid off our loan, we’d be left with cash in our pocket of $1million, and next year we’d have that $257 million in cash flow all to ourselves. Nice! More than nice! Let’s do it!
15 comments
IDEARC:
I will assume you know something Goldman doesn’t, seeing they have a sell rating and $1 px target. With Idearc’s negative growth the last 24 months, that free cash flow will be zero in very short order.
Yes, we all know that Google is the only public company worth owning anymore. Why would you question this, Wick?
I am in, do you want me to call you or do you want to call me? -Alex 214.558.1079
DKC: Who cares if the cash flow goes to zero? We’re buying the entire company for zero. So we get that cash flow for the next few years while it lasts. (But you go ahead and follow the guys at Goldman.)
DKC: More… I wouldn’t buy a share of stock in either company. But the whole company? For free?
Wick: You will get the free cash flow; however, when you go to sell the POS you will probably end up selling it for much less than the entire cash flow you received.
Oh well…Who am I to stand in the way of capitalism. With Obama approaching fast in the rearview mirror, we better take advantage of capitalism before it is wiped out as we now know it.
Plus, you get the Cue Cat!
Someone call Cuban stat!
DKC: “when you go to sell the POS you will probably end up selling it for much less than the entire cash flow you received” Are you being obtuse or is it me? So what if you sell it for less? You bought it for nothing. Whatever you sell it for is free money.
I think you have hit on a good point, Wick. The Wall St. guys are looking for long term growth oopportunities, not sucking the remaining marrow out of those declining revenue bones.
It would be interesting to see how far the revenue stream of those two companies has to fall before you go negative cash flowing?
Wick: “If you and I borrowed $256 million today, bought the company, paid off our loan”
You didn’t get it for free, you had to borrow the money AND pay it back. I am assuming you will use the proceeds of the sale to pay back the loan. If someone forgives your loan…then yes your are getting it for free.
i’m just guessing but buying a company typically includes assuming the debt the company currently carries…because i am lazy and don’t feel like looking it up…i would image the debt load for both of these companies is quite large. quick ex:
Belo mkt cap is $256M
Free Cash Flow is $256M
Total Debt is $1B (annual payments are $100M note is due in 5 yrs)
So u buy a company with rapidly declining cash flow for $256M…you collect the Cash flow yr 1 and payoff the loan…but you have also assumed $1B in debt that matures in 5 yrs…although the annual pmt on the debt is only $100M…if cash flow continues to decline at the current rate by yr 3 you are going to have a bunch of debt remaining and no cash flow to pay it off.
Wick / DCM – get it, got it, muy bien!!
Idearc spun off from Verizon with $9 billion (with a b) in debt.
ummm yeah, A.H. Belo has no debt. You must have looked at Belo, the broadcasting company, which does. As for Idearc, the free cash flow is after debt service.
i just looked ur rite zero debt…maybe an interesting value play, but with decling rev, that means overhead needs to be reduced which means less meaningful content, etc…u know the game. there may be a value there tho, tough to say.
Verizon Information Services spun off the yellow pages division to become Idearc Media in 2007. With it came a VERIZON DEBT of 9 Billion $. Not Idearc’s but Verizon’s.