Yellow Media Q3-2011 release

Investors are likely skittish with the upcoming release of Yellow Media’s (TSX: YLO) quarterly results. When looking at the other earnings release dates this year, we had the following results:

February 10, 2011: YLO lost -0.33%; common shares were $6.09 at the previous close and $6.07 at the close.
May 5, 2011: YLO gained 1.58%; common shares were $4.44 at the previous close and $4.51 at the close.
August 4, 2011: YLO lost -43.30%; common shares were $1.94 at the previous close and $1.10 at the close (went as low as $0.72 four trading days later);
November 3, 2011: Common shares are $0.33 at the close of November 1 trading.

I’m guessing the selling we have been seeing in the last few days is consolidation and profit-taking after the huge run-up the stock had over the past month – it has gone from a low of 12.5 cents up to 61 cents. Preferred shares and debentures are also trading implicitly with the assumption that the company faces a high chance of going into creditor protection sometime in 2013 (which is fair considering this is the maturity of their credit facility and the beginning of the maturities for their Medium Term Notes).

Investors already know there is going to be a huge write-down ($2.9 billion) of goodwill, which will create a headline of a multi-billion dollar loss for the company. Major media outlets will probably want to report on this large headline number. However, investors must look strictly at the cash flow statement and determine whether the operating entity is generating cash that will ultimately be servicing the debt. The decay of this number will determine whether the market is likely to be correct (i.e. good luck refinancing) or whether the company can exceed low expectations (a decrease in the cash flow decay). The logical consequence of the scenario where the cash flow decline is stemmed is that they will continue paying preferred dividends and be able to chip away at their debt.

Again, this is a high risk, very high reward type scenario in the event that the company can stop the bleeding.