Description

InfoUSA Inc. (NASDAQ: IUSA) is an attractive opportunity based on valuation, a defensible business model with substantial barriers to entry, a compelling risk/return investment proposition and a CEO/founder who owns nearly 40% of the shares and thus is highly incented to drive shareholder value. IUSA is a database marketing company whose principal assets consist of a database of 14 million U.S. and Canadian businesses and another that has 250 million consumers, 115 million households and 55 million homeowners. IUSA’s clients use its products and services to identify and qualify prospective customers, initiate direct marketing campaigns, and analyze and assess markets. IUSA’s 10K and website (www.infousa.com) do a fine job describing the business so I will focus here on the investment thesis for IUSA’s stock. I first penned this piece three weeks ago for my application submission and was unaware that there had been a previous posting in 2001 regarding IUSA (for some reason, IUSA does not appear on the VIC company index available for guest access). However, I have added a few comments at the end of this piece to address some concerns raised in response to that 2001 posting. Also, IUSA reported Q1 results Friday, April 18, but the Company did not provide sufficient information (e.g. cash flow data) to update all of the figures below on an LTM basis so rather than mix and match I have left the 2002 figures, which do not differ materially from the LTM numbers. I will update the data after I have reviewed the 10Q and heard management’s earnings call.

Valuation. First, the numbers (all figures are for 2002), followed by a discussion of valuation:

(millions)
TSO: 51.1
Price/share: 4.95
MVE: 253.2
Net Debt: 174.4
EV: 427.6

EBITDA(1): 85.6
EBIT(1): 57.5
Net Income: 20.4
Operating EPS: 0.43
Cash EPS: 0.75
FCF: 48.3

EV/EBITDA: 5.0x
EV/(EBITDA – capex – software development): 5.3x
EV/EBIT: 7.4x
P/E (operating EPS): 11.5x
P/E (cash EPS): 6.6x
1 Excludes $2.9 of restructuring and litigation charges.

By most objective measures, IUSA stock is reasonably cheap for a defensible, highly cash-generative business at 5.3x EV/(EBITDA – capex - software development), 5x EV/EBITDA, 11.5x operating EPS and 6.6x cash EPS. These valuation metrics are even more compelling relative to IUSA’s comparables such as Acxiom, Dun & Bradstreet, Equifax and Harte-Hanks, which trade at 7.5x to over 10x EBITDA and 13-18x trailing earnings. None of these companies are perfect comps for IUSA, and indeed they all are larger and probably provide more value-added than IUSA so some modest discount is appropriate. However, IUSA enjoys better margins than most of these comps, and the current exceedingly wide gap in valuations is unjustified.

While IUSA is reasonably cheap on a public trading basis, it trades at a huge discount to private market or takeout value. Although the universe of sale comparables is admittedly slim, assets of any scale in the database marketing and marketing services industries have generally traded at double-digit EBITDA multiples. Even without a strategic takeout multiple, with IUSA’s strong stable cash flows, it would be an attractive LBO that today could fetch 6-7x EBITDA, or approximately $7-8/share, with further upside in the future in a recovering economy. Indeed, given IUSA’s small float and lack of research coverage, it probably should not be public, and all of its constituents would be well served by a going-private transaction (more on this below).

Highly Cash Generative Business. Notwithstanding the difficult macroeconomic environment, which clearly has impacted IUSA’s business, the Company continues to generate prodigious FCF (defined as operating cash flow less capex and software development; NB – calculating FCF by starting with net income (excluding the impact of certain non-cash and non-recurring figures) instead of OCF yields comparable figures): in 2002, IUSA generated FCF of $48.3mm on a MVE base of $253mm, for a FCF yield of nearly 20%. This cash generation has allowed IUSA to delever substantially in the past two years (high leverage was one of the knocks on the idea when posted in 2001). Management has stated that it expects to generate at least $45-50 million of free cash flow in 2003 even in a sluggish economic environment, which will drive further deleveraging and equity value creation, and this contention is amply supported by continued high free cash flow and debt reduction in a weak Q1. As the Company will soon have less than 2x Debt/EBITDA even without any growth, it could also use a portion of its cash flow to repurchase stock (even if this requires lender consent to do, such consent should be easy to obtain given IUSA’s strong credit stats and cash generation).

Leverage to Economic Recovery. The discussion above is based on the Company’s current operating performance, which reflects the sluggish economic environment (I have assumed flattish EBITDA in 2003 of $80-90 million). However, IUSA has strong operating leverage to any economic recovery and resumption of more normalized marketing spend by its client base. As you might intuit given the nature of IUSA’s database assets, it incurs very low incremental costs to generate a dollar of incremental revenue – the Company estimates its incremental costs to be as low as 5% of incremental revenues, which appears too low, but in any event it is clear that even modest increases in revenue will flow substantially to the bottom line. Accordingly, in addition to representing a good value given the status quo, IUSA also is a good play on a recovering economy as its cash flow and earnings should accelerate significantly in any such rebound.

Defensible Business Model. If IUSA is such a stable, cash-generative business, why won’t it attract new competition? The simple answer is that it would be prohibitively time-consuming and expensive to replicate IUSA’s huge database, which is why industry participants have tended to acquire such capabilities, including IUSA’s 1999 purchase of the 80+ year old Donnelley Marketing consumer database.

Founder/CEO Incented to Create Value. IUSA’s founder/CEO Vinod Gupta owns nearly 40% of the Company and has publicly expressed his frustration with IUSA’s stock price. Given his large stake and past difficulty in withdrawing from the business (he briefly hired another CEO for a year in 1997-98, which did not work out), Gupta’s only realistic path to ultimate liquidity would be a sale of the business; however, he clearly is not a seller at levels anywhere near the current stock price. Having said that, he has intimated on recent earnings calls that if the stock did not move, he might evaluate a going-private transaction, which would be a catalyst for near-term value creation.

One of the issues raised in response to the 2001 posting on IUSA was management, with respect to both inaccessibility and a strategic direction that was allegedly fickle or Wall Street-driven. I am not here to serve as an apologist for the CEO; however, the Company generally has good and prompt disclosure and is available on quarterly earnings calls so the core issue of information flow seems to me to be OK. As for the strategy issue, it was a much more acute issue in late 2001 as IUSA had reversed an ill-fated and expensive detour in the Internet frenzy. However, since then, management has stayed the course with respect to reducing costs and debt and making small, accretive acquisitions out of FCF. I believe this consistency answers the questions of whether the focus on debt reduction was just a passing fad, though in my mind the biggest risk in this situation is a large, value-destroying acquisition. Finally, I do applaud the CEO/Board for issuing options with strike prices generally well above market (e.g. options issued last year with a strike of $10 when the stock was $7.14). How many management teams would exercise this discipline and regard for shareholders instead of issuing themselves bucketfuls of options at cyclically depressed market prices?

Catalyst

• Continued strong cash flow generation and debt paydown, with attendant equity value creation
• Strategic sale or going-private transaction
• Share repurchases
• Economic rebound and resulting earnings increases