I’ve recently come to the discovery that there are a handful of financial advisors and millionaires that read my blog that have talked to a few associates of mine that think I have gone off the deep end with regards to Yellow Media. Reportedly, all of the things that they look for in a company, also known as key indicators, are missing or non-existent for Yellow Media. That and their null hypothesis is that they perceive that the stock, which has fallen from $5.39 last year this time to $0.09 today, has no reason not to fall to $0 and expire worthless. After falling 98%, what’s to keep it from falling an additional 2% from where we started? After all, that’s practically nothing.
Yes, the valuation for a company with billions in revenues is in the tens of millions, effectively valuing the equity at nothing. Yes, in the last 12 months the earnings of this company are around -$2.85B, so it appears to be losing a lot of money. Yes, the revenues have been declining and if you do your best not to pay attention, you’ll forget to note that they’ve been selling assets that attribute to this decline as well.
Yes, their print business revenue declined last year and probably will this year.
Yes, analysts value the company at $0.
Yes, the stock price is at an all time low.
Yes, the debt has been downgraded and will be downgraded again when the preferreds don’t pay their dividend.
Yes, I know, phone book suck and nobody uses them.
Oh, right, and if you look at their fully diluted share count, their fully diluted shares have skyrocketed as their price has fallen due to the conversion clauses being related to stock price valuation.
Yes, I understand, it’s trading on the pink sheets.
Yes, I hear you, everyone says that this sucks and that I am off the deep end after getting blown out of the water by chinese fraud.
So, all that said, let’s put this in terms you can understand, let’s go with the terms of a right out of college graduate who Freddie Mac and Fannie mai seem to think is in risk of default on their student loans.
This graduate receives an offer for $50,000 to work. Their expenses are are around $40K a year to live and interest and taxes and all the goobely garb. Their expenses fluctuate with their revenue, so a 5% decrease in revenue yields a 5% decrease in expenses. The graduate has student loans of $80K (net liability). This graduate is kind of dumb and is expected to make less money over the next 10 years but we don’t expect him to lose money. So instead of making $10K, he might make $9K or $8K or $7K in the next 4 years.
Now, imagine that there is slavery. You can buy this graduate and make them your slave for $2K today. Would you pay $2K to take on the liability of the graduate, $88K (adding the cash back to the net liability), the bank account, of the graduate, around $8K in cash, and free cash flow per year of around $10K but it is decreasing?
Assets: $8K in cash
Liabilities: $88K in student loans
Free cash flow: $10K (after taxes and interest, so as you pay off debt, this goes up)
You can enslave this graduate for $2K today. Is this a good deal?
If you’re asking me, I would pay $2K to make them my slave, take the $8K from their bank account as well as $40K from mine and pay their student loans down to $40K. This would take their free cash flow up to $12K/year.
I could resell this graduate, who now lacks default risk, back into the market at a multiple of around 6x their free cash flow. I’d sell the graduate for $72K.
So, the total cost was $2K+$40K and I just walked away with $72K. That’s a solid return of $30K on $42K of investment and it only took a few weeks of effort.