Description

Valuation

D&B is not exactly cheap trading at somewhere between a 4-6% FCF yield that is likely melting - - organic revenue growth has been below 3% the past 6 quarters.  D&B is often the subject of PE takeover banter, and in this climate, I could sure see people worrying about that.  Two things make me slightly less concerned over this risk:  1. The Company has taken restructuring charges nearly every year of its 10 year+ existence as a separate public company;  2. The share currently trade for double digit multiples of EBITDA.  Oh, and third, I suppose, D&B’s business has deteriorated since 2007, the height of a previous PE feeding frenzy. Indeed, I spoke to a person very familiar with D&B (no material nonpublic information) who did consulting work for some of the major PE firms investing in D&B’s industry.  His response, “What the heck could anyone do that hasn’t been tried.  Do you see how many pivots and restructurings that this company has made?”

What are the shares worth?  Tough to say.  I would want double the yield or more in a company that has many signposts of being stuck in the cross hairs of an Innovator’s Dilemma type fate. 

RMS’s Barriers to Entry Permanently Impaired

Dun & Bradstreet had massive barriers in its risk management segment, especially in North America.  I believe this segment was a principal driver of DNB’s 40-50%+ ROICs (depending on your methodology. Building the database supporting these tools had been a massive, and massively expensive undertaking – in some cases going door to door.  The rapidly declining costs of technology and democratizing nature of the interest have been assailing this segment for years now.  The demand for “big data” tools has helped fund the development of a litany of tools that could dramatically increase the availability of data and lower the costs of collecting it.

As mentioned above, I believe that the Company finds itself in the classic Innovator’s Dilemma type pickle.

Short capitulation

Dun & Bradstreet has consistently had a short interest in the millions over the last few years.  It is obvious that in September a large number of shorts either capitulated and covered or they had already done so and shorts initiated after the stock increase in March rang the proverbial register.

Management

First, I find it interesting that management’s compensation seems to not be correlated, or perhaps negatively correlated, with share price performance.  I think it is noteworthy that the firm’s head of sales resigned after 2 years because of disappointment at promotion opportunities (company line – or partial line) when he was originally hired to head European sales and was promoted within 2 years.

Risks

Popular short thesis.

While I seriously discount PE interest, I can’t rule out this as a concern given the cash sloshing around (or waiting to be called).  

Unforutnately, this might be a "melting ice cube" type short.

Catalyst

Continued deterioration in the business.

Yet another "pivot."