This High Yielding Media Delivery Business Is Cheap

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Valassis Communications (NYSE: VCI) has lagged the overall market since the beginning of the year. Over the past seven months, the S&P 500 has gained around 18%, much higher than the 9% return of Valassis in the same period. Interestingly, Michael Price and Jeremy Grantham have accumulated the company’s shares since the fourth quarter last year. Let’s take a closer look to see whether or not Valassis is attractive now.

The shared mail segment is the largest income contributor

Valassis is the leading provider of innovative media solutions to more than 15,000 advertisers, operating in three main business segments: Shared Mail, Neighborhood Targeted, Free-standing Inserts, and other business lines captioned as International, Digital Media & Services.

Most of its operating profit, $201.4 million, or 87.3% of the total segment profit, was generated from the Shared Mail segment, while the Free-standing Inserts segment ranked second with $21.9 million in operating profits. The Shared Mail segment is to distribute shared mail advertising products to around 70 million U.S. households.

The company is proud that it has one of the most comprehensive residential address lists in the U.S., with a total reach of more than 113 million U.S. households. The Shared Mail client base is quite diverse, with the top 10 clients accounting for 17% of total Shared Mail’s revenue.

Valassis has experienced fluctuating net income in the past five years in the range of $(207) million to $385 million. In 2012, with revenue of $2.16 billion, the net income came in at $119 million, or $2.84 per share. Looking closer, since 2010, while the Free-standing Inserts and the Neighborhood Targeted segment experienced consistent declines in revenue, the Shared Mail segment generated consistent increasing sales with an increase in profits as well.

In terms of the capital structure, the company employs some leverage in its operations. As of March 2013, it had $480 million in equity, $97 million in cash, and $584 million in both long and short-term debt.

News Corp is cheaper after the split

The company is trading at $28.20 per share with a total market cap of more than $1.1 billion. The market values the company quite cheaply, at only 5.7 times its trailing EBITDA (earnings before interest, taxes, depreciation, and amortization). Compared to its peer, the new News Corp (NASDAQ: NWS), Valassis still has a higher valuation. We call the company the new News Corporation because the company had decided to split itself into two pieces: the new News Corp, the newspaper business, and Twenty-First Century Fox (NASDAQ: NWSA), the entertainment business.

The new News Corp is trading at around $15 per share with a total market cap of $8.6 billion. The market values the company quite cheaply, at only 3.8 times its pro-forma 2012 EBITDA. The new News Corp will own several prestige assets including The Wall Street Journal, The New York Post, and the book publisher Harper Collins. It also owns the sports programming and pay-TV distribution business for Fox Sports. After the business split, the new News Corp carries a debt-free balance sheet with $12.6 billion in equity, $1.54 billion in cash, $2.85 billion in investments, and no debt.

Twenty-First Century Fox, on the other hand, is considered a much higher growth business with several good assets including filmed entertainment, cable and television, and direct satellite broadcasting. What might make investors worried is its high level of goodwill and intangibles.

At the end of 2012, it had $14.4 billion in equity, $3.52 billion in debt, but the goodwill & intangible assets came in at more than $16.6 billion. Thus, Twenty-First Century Fox had a negative tangible book value of around $(2.2) billion. Because of a higher growth business, Twenty-First Century Fox has a much higher valuation. Its EBITDA is around 11.04. 

My Foolish take

Valassis is cheap, but it might be due to the fact that the market is staying away from the declining newspaper insert business. However, as mentioned above, most of its revenue and profit came from the Shared Mail business, and this business is actually growing at a good rate.

Investors might get bullish about Valassis with its intention to spend more than a third of its free cash flow to return cash to its investors via share repurchases and dividend payments. Investors also get a good dividend yield of 4.4% at its current trading price.

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Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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