Supermedia Inc. (SPMD): A Misunderstood Orphan

A Call Option with a Strike Price of $50!

Based on committed capital, SuperMedia represents my best investment idea and my reasoning stands as I think 6-7 times EBITDA is sound based on historic purchases of comparable companies, a conservative approximation, along with EBITDA margins of 30% - 32% on whatever you would consider to be normalized sales reflecting a fair intrinsic value of the company from a quantitative standpoint. There have been plenty of comparable deals where you can go through the transactions made by private equity firms and get these numbers on an EV/REV basis or EV/EBITDA. I have used them in estimating intrinsic value but hold little expectations of a deal consummating and believe it fair to hold an expectation of such an event transpiring only after issues are resolved and enterprise value remains low.

 A qualitative assessment of the company should also be considered as well to understand any estimation of the intrinsic value. I have read a few responses where it is understood that the company has no competitive advantage and my opinion is in the affirmative with this stance. Only I would go further in saying that finding companies with those advantages at a very fair price is more the exception than the rule and if any, it lies in  the company's association with Verizon. At this point I am far more interested in top level management's, more so the new CEO's, thinking as to where in the competitive landscape the company believes it stands and how they intend to manage these forces to include vision and corporate strategy. There is some evidence as to how they intend to navigate the environment but would but that was executed by the previous CEO Scott Klein but only done in the tail end of his tenure. 

Debt is an issue but I would consider a study of a company, the company BBEP, as far as the effects of debt pay down especially given the company's ability to purchase debt a market rates, which won't be free reins to buy it all up but capped to an extent. This doesn't take into account things that can be done to improve the balance sheet that range from nil to large negative effects on costs to current shareholders.

Comparable to Dex One Corporation(DEXO), We have a competitor who trades at a market capitalization of $40 million, larger debt load and less room for improvement in headcount. With these comparisons, there lies a company with a huge risk reward imbalance with SPMD.

What have is an orphan equity to what seems to be a stub stock at LEAP option pricing which expires in 5 years. The current GAAP earnings are not a true reflection of the earnings power of the company and find the cash flow from operations to be a better indicator. Certain catalysts should become evident in the near future we believe will come from 1)a better reflection of the company's GAAP earnings as to earnings that will not be affected by fresh start accounting and 2) pay down of debt which the company is in negotiations to make amendments to pay down debt below par at market rates.

Variant view:
Sales never stabilizes
Small and Medium businesses are not satisfied with products and services
EBITDA margins lower than expected on average.
Debt pay down and/or balance sheet improvement concept proven wrong. 

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