February 3, 2006-- Workers pass by a Yellow Pages reference room in their Montreal offices on February 3, 2006. For Business. Globe and Mail/Christinne MuschiChristinne Muschi/The Globe and Mail
TD Newcrest analyst Scott Cuthbertson threw in the towel on Yellow Media Inc. , slashing his price target by half to $2 and downgrading it to "sell" after having recommended investors hold it since the beginning of March 2010, when the stock traded around $6.
"The basis of that rating was fairly stable financial performance and outlook, and a confidence that the distribution/dividend was sustainable, providing the vast majority of the expected annual return," Mr Cuthbertson wrote in a research note.
But since then, revenue has been rapidly declining, the dividend no longer appears secure (indeed, he expects the payout to vanish by year-end), and Yellow Media's debt is offering junk-bond yields -- "an important red flag to equity investors in our opinion, as they naturally rank behind debt holders in terms of seniority."
The stock is likely to be removed from the TSX 60 index and, with a price below $3, is no longer eligible for margin purchases, he said.
In addition, San Francisco's decision to ban the unsolicited distribution of yellow page directories is likely to be followed by other North American cities, Mr. Cuthbertson said.
"Accordingly, our strong preference is to be unexposed to this story until a clear turnaround has been established, allowing a more reasonable estimation of future equity value with a lower risk profile. We would much rather investors miss the first dollar of upside but enter the stock confident in its future trajectory than try to determine the low point of equity value with the lack of visibility and degree of volatility we are now experiencing," Mr. Cuthbertson said.
"While the share price could stabilize in the short term...we are uncomfortable recommending ownership of a company that has such poor visibility on its potential to turn around what has become a business in accelerating decline."
Yellow Media now has three "sell" ratings and nine "hold" ratings, and zero "buys", according to Bloomberg data. The consensus 12-month target price is $3.88.
The stock has lost 57 per cent of its value this year.
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Sonali Verma