cut its 2007 sales guidance Monday evening, causing at least two analysts on Tuesday to downgrade the yellow pages publisher. The stock fell $2.83, or 4.64%, to $58.11 on Wednesday.
Management cited poor advertising demand from the housing slump in the Florida and Nevada markets. Previously forecasting "modestly positive" advertising revenue growth this year, the company now expects sales to come in flat to down 1%.
R.H. Donnelley prints about 80 million directories each year, reaching about 30 states, including growing markets such as Phoenix, Las Vegas and Orlando. The company is now the third-largest publisher of yellow-pages books, following last year's purchase of Dex Media for $9.5 billion including assumed debt.
But in addition to the declining housing market, R.H. Donnelley is suffering from slower overall economic growth. And even if Ben Bernanke and the Fed can help stem this tide with the recent and potential future interest rate cuts, the company is also seeing a strong secular shift in advertising demand toward online properties and away from traditional print venues.
With that in mind, I'm here to answer readers' questions: Should you buy it? Has the selloff in R.H. Donnelley already reflected the decline in demand for the company's print advertising, or could the stock still fall further from here?
At current levels, the stock is now down 20% since July 25, which is the day before R.H. Donnelley outbid the likes of
New York Times
, 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.
David Peltier is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;
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