Deutsche Bank media analyst Paul Ginocchio and his team released a research report last week in which the bank reaffirmed its target share price for R.H. Donnelley (US$80 — reduced to US$65 this week after RHD issued its year-end guidance) and “Buy” rating and issued a less glowing assessment of Idearc Media, for which it lowered its price target from US$28 to US$20. On Dec. 4, RHD closed at 40.13, while Idearc closed at 17.72. Both stocks were trading lower at this writing on Wednesday.
In explaining its decision to maintain its target for RHD, Deutsche Bank wrote that, “We believe it can successfully transition from print to ‘triple play’ and thus sustain its revenues and EBITDA.” The bank takes a different view of Idearc. “We lower our price target on Hold-rated Idearc (IAR) from $28 to $20 due to our concerns about its large market exposure and discount for uncertainty regarding the CFO’s recent and sudden departure.”
The last item refers to the sudden and unexplained departure of Andy Coticchio. Dee Jones has replaced Coticchio on an interim basis. Jones had been head of investor relations.
It’s interesting that Deutsche Bank cites concerns about Idearc’s major metro markets in its decision to lower its target price. On Idearc’s third-quarter earnings call, CEO Kathy Harless said market size was not a performance determinant. Here is what she said (in response to a question from Ginocchio):
“I would tell you as I look daily at the canvasing and whether or not we’re in a small market or a large market, we are not seeing any differences as far as at the end of today it boils down to how well you are executing out there. And you could have a bad small market based upon you had three or four reps quit [on] you in the middle of the canvas. You could have the same issue in the large market. But from a true just demand basis, we are not seeing any differences there.”
In September, The Kelsey Group wrote an Advisory on the topic titled “Publishers Seek Rx for Ailing Big City Markets.” The Advisory includes data from an online survey that suggest most incumbent publishers in developed markets worldwide are experiencing at least some greater level of difficulty in selling print directory advertising in large metros.
Deutsche Bank reads the departure of Coticchio as a signal Idearc may be getting ready to be sold, possibly to RHD. The bank acknowledges the current state of the credit market makes any such deal difficult to pull off right now.
While TKG has no specific predictions on deals, we do agree there will eventually be more consolidation in the U.S. directory market. The pressure to maintain margins will drive the need for ever-greater scale. Plus, it has become increasingly clear that ultimate victory will go to the publisher with the most comprehensive national sales coverage (assuming the publisher can execute on a cross-platform sales model).