Remember the income-trust craze? Back in 2006, Yellow Media could do no wrong. With a yield north of 10%, it was a portfolio staple, its units trading for a lofty $17 apiece.
Then disaster struck: the government changed the income trust rules, and Yellow Media’s valuation dropped through the floor. At the same time, the telephone directory publisher was sideswiped by the implosion of its core industry. Print revenues were declining, and online properties weren’t making up for it. In August 2011, after announcing a $14.3-million second-quarter loss, the company slashed its dividend by 76%. Investors panicked. The company’s stock price dropped 97% that year.
Many of today’s investors want nothing to do with the company. Too bad. They are missing out on a miraculous recovery. In the past 12 months the stock has risen by 150%. Canaccord Genuity analyst Aravinda Galappatthige thinks the best is yet to come. “This is the turnaround story in the Canadian media space,” he says.
Over the past year and a half the company has tried hard to reinvent itself, right down to the ticker symbol. YLO died when the company’s creditors agreed to swap $1.8 billion in debt for equity (existing shareholders saw their equity stake obliterated in a 200:1 stock consolidation). It began trading under the symbol Y in late 2012, sans dividend.
In January it installed a new CEO. Most important, it’s now deriving about 45% of its revenues from digital, up from about 25% in 2011. That could climb to 60% by 2015, says Galappatthige.
Although the company still sells advertising in its phone books, its future is in digital marketing. Directory publishers now build websites, help companies market via social media and offer search-engine optimization services, says Charles Laughlin, senior vice-president and analyst with ad research firm BIA Kelsey.
Print declines are still dragging down earnings, but Galappatthige thinks Yellow Media’s EBITDA will start growing in early 2016. Online earnings are expanding by 10% to 15% a year.
Galappatthige expects that once it pays down its debt, Yellow Media will resume paying a dividend. Laughlin is optimistic too. “We have to wait and see if these companies will thrive, but they’ll certainly survive,” he says.