Should You Buy It? Hang Up on R.H. Donnelley

At current levels, the stock is now down 20% since July 25, which is the day before R.H. Donnelley outbid the likes of Dow Jones(DJ Quote), New York Times(NYT Quote) and News Corp.(NWS Quote), paying $345 million for Business.com.

The domain name, which set a record in 1999 selling for $7.5 million, was turned into a profitable directory search service by private investors.

Management is hoping the purchase will expand R.H. Donnelley's Internet presence and reduce its dependence on the core yellow-pages business, while picking up online advertising.

But Business.com represents only about 2% of R.H. Donnelley's total expected 2007 revenue, and management had to take on more debt to make the acquisition. At the end of the second quarter, the company already had more than $10 billion in debt, equal to about 5.3 times shareholder equity.

While management also said Monday night that it is looking to refinance $600 million of its 10.875%-coupon notes at lower rates, R.H. Donnelley may be one of several companies that would suffer if the current credit crunch continues.

Despite the stock's recent pullback, I believe that readers should avoid buying R.H. Donnelley at current levels. The company's high-debt load limits management's ability to make more acquisitions and transform itself into an Internet search leader, moving away from the declining traditional yellow pages business.

In fact, unless you want to short R.H. Donnelley's shares, you may have a long wait before the stock is a worthy investment. I believe that R.H. Donnelley is more likely to reach $50 in the coming months than to trade back up toward the $70s.