Yellow Media Q3 projections

Here are some estimates regarding benchmarking Thursday’s earnings report for Yellow Media.

(2011 / 2010 / % change)
For the 6-month period of 2011 vs. 2010, we have:
Revenues: $692.1M / $699.8M / -1%
EBIDTA: $366.5M / $402.6M / -9%
Cash Flow from Ops: $199.6M / $293.5M / -32%
Adjusted free cash flow: $206.2M / $273.2M / -25%

For the 3-month period of Q2-2011 vs. Q2-2010, we have:
Revenues: $342.7M / $360.1M / -5%
EBIDTA: $176.5M / $204.0M / -13%
Cash Flow from Ops: $87.9M / $165.8M / -47%
Adjusted free cash flow: $89.2M / $136.2M / -35%

It is this deviation from the above two that show an accelerating decay in projected cash flows. Specifically the EBITDA number is going to be an easy way of determining a hit or a miss – if this number exhibits accelerated decay beyond -17% or so from Q3-2010, then this will not be a “good thing”.

Readers should also be advised that recent releases of information include the impact of the Trader Corporation disposal such that revenues and cash flows from prior statements are not directly comparable without doing digging in the proper documents.

Specifically, Q3-2010 results excluding Trader Corporation is revenues of $355.9M and EBITDA of $193.2M.

So with that, we have the following for Q3-2011:

Better than expected – EBITDA of $175.8M or above;
Worse than expected – EBITDA of $160.4M or below.

Brace for impact.

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.

The EU bailout comes to an abrupt finish

I believe it was George Soros that was quoted that the recent bailout agreement with Greece would last “between one day to three months”, and it appears the answer will be less than a week. With the Greek government exercising a political move to have the bailout criteria go to a public referendum, it once again ratchets up the risk of a sovereign default and extends the drama and impact on the financial markets.

Even if this wasn’t the case, I would think that the next focus would be on Portugal’s solvency.

How long can the people of Germany and France allow their governments to subsidize the lifestyles of people in other countries? This is essentially the political question – admission to the Eurozone will inevitably have to be revoked if countries go beyond a certain metric regarding their financial performance.

If there is another push on credit, we’ll be seeing the usual happen – US dollar up, US treasury bond yields down, and commodities taking a nose dive – the typical “risk off” trade. Everybody investing in the markets at this time is forced to become a macroeconomic/geopolitical analyst to explain some of the risk in the securities they are investing in today. There will probably be continued aftershocks as this drama continues to unfold.

Kicking the can forward

Now that the European debt situation is seemingly resolved, the markets are now on rally mode. Credit is loosening again and this gets reflected in the price of debt and equity.

How long will be it before the other countries in Europe line up at the trough?

The fundamental problem is debt accumulation and it is not solved by a one-time papering over – somebody has to pay for it. It is just a matter of when.

Of course this is sour grapes because of my high cash position, and I do suspect that plenty of others are on the sidelines. This is especially for pension fund managers that have to make their mandated 7.5% return on assets while sitting on a mount of 10-year treasury bonds yielding 2.2%. They are forced to buy equities since there is no other assets that can possibly generate a higher return.

Commodities are also making a return, assisted with the US dollar depreciating again over the past month.

This is almost turning out to be a mirror image of the 2008 financial crisis – in October of 2008, the world’s problems were solved with things like TARP and QE, but it took another six months for the markets to fully digest it and reach a panic low. It is something I am open to believing may happen again.

Yellow Media preferred differentials

As I pointed out earlier, there was a significant yield differential between Yellow Media preferred shares C and D (TSX: YLO.PR.C and YLO.PR.D). The market has closed this gap now to about 0.7% if you use the most generous bid-ask spread quotations (e.g. the ask on the C’s vs. the bid on the D’s).

The common shares have gone on a massive surge over the past couple weeks, and this has translated into strong gains for those that have held their noses and accumulated positions during the meltdown.

The closest analogy I can think of what is happening is what happened to Telus (TSX: T) back in 2002 when the whole market dumped them down to $3.50/share for no real reason other than that they had a lot of debt and old-school telecom was on its way out.

Common shareholders face the most risk and will receive the most reward in a favourable scenario, but preferred shareholders will also come out very well and continue to receive income.

Of course this can all blow up if the next quarterly report is adverse. However, you would think after inking their last credit facility that they would have had some sort of visibility on their results to prevent an early default.