Standing Up to Murdoch: Under the Radar

BOSTON (TheStreet) -- Valassis Communications (VCI) won a $500 million settlement from Rupert Murdoch's News Corp. (NWSA) - Get Report in February while securing a 10-year shared-distribution agreement. The two companies vie for direct-marketing customers, and News Corp. recently succumbed to anti-competitive behavior.

Valassis suffered an accumulated loss of $4.37 a share in 2008 as its stock price plummeted 90%. Some analysts chalked it up to the recession or exposure to an "old media" industry. In reality, Valassis, which has a market value of $1.3 billion, was being victimized by its leviathan rival. News Corp. threatened to impose higher prices if its customers did business with Valassis.

Valassis generated about $2.2 billion of revenue in 2009, with a majority coming from its shared-mail business. Its newspaper inserts, on-page advertisements, door hangers and coupons might seem antiquated, but they have a track record of success, and unwilling "new media" competitors, who favor online avenues, are quitting the game.

Valassis swung to a fourth-quarter profit of $24 million, or 48 cents a share, from a loss of $222 million, or $4.63, a year earlier. Revenue declined 3.4% to $605 million, but profit spreads improved. The company's operating margin widened from 6.3% to 10%. Cash grew 3% to $130 million as debt fell16% to $1 billion.

The 2009 turnaround, coupled with a positive conclusion to the News Corp. suit, has buoyed Vallasis shares. The stock delivered a one-year return of 1,900%. Given the recent surge, is it still a sound decision to purchase Valassis? Based on valuation, it is. The stock trades at a price-to-projected-earnings ratio of 11, a 31% discount to the industry average.

Its PEG ratio, a measure of value relative to expected growth, is low at 0.6. (A PEG ratio below 1 implies a cheap stock.) By comparison, the media industry average is 1.1. Furthermore, the stock's 0.6 price-to-sales ratio represents a 70% discount to the industry average. That discount isn't justified based on lower margins. Valassis enjoys a gross spread of 28%.

The sell-side remains optimistic about Valassis. Of eight analysts surveyed by

Bloomberg

, six recommend purchasing shares and the remainder advise holding. The most bullish price target is that of

Northcoast Research

, which expects the stock to rise 49% and hit $40. Major holders include

State Street

(STT) - Get Report

and

BlackRock

(BLK) - Get Report

.

-- Reported by Jake Lynch in Boston.