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MagicDiligence (< 20)

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January 24, 2008 – Comments (0) | RELATED TICKERS: IAR , EDS

Since I personally vet all potential picks, from time to time I want to write about stocks that meet the fundamental criteria for this portfolio, but don't pass due diligence.  There are two recent reviews that I threw out.

 

1) Idearc (IAR), a mid-cap, high-yielding stock that seems to be a perennial Magic Formula listing.  Spun off from Verizon, they publish the yellow pages books in areas where Verizon is the phone carrier.  They also run yellowpages.com.  It's a highly profitable business with little capital needed.  But IAR is not an attractive pick.  For one, it's business is declining as ad money moves online and electronic directories gain prominence.  yellowpages.com is not as profitable as published phone books.  More importantly, Verizon hamstrung IAR with a big debt load - over 9 BILLION in long term debt vs just 300m in cash.  Coverage ratio is barely over 2.  This company has no financial net if something goes wrong.  REJECTED!

 

2) Electronic Data Systems (EDS), a large-cap stock showing up in the top 50 over 2b in the MF screen.  This was a close call.  EDS has been pretty bad the last 5 years, but results are showing a marked rise in profitability as they move towards higher margin BPO services.  Debt is reasonable, although coverage ratio is borderline at about 5.  What caused me to reject it is that I don't think the MF screen's return on tangible capital is all that accurate - I calculate about 22% ROTC, which is hardly stellar.  Additionally, the company is not a strong free cash flow producer - FCF margin is only about 2%, anemic.  I don't think EDS is a terrible pick, but it's not as strong as I would like.  REJECTED, but barely. 

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