Description

IUSA is a restructuring play: the company reversed its two-year long foray into Internet-related ventures with the restructuring of all four of its Internet initiatives in Q400. As a result of laying off about 450 employees, cutting back on “brand building” expenses, and consolidating the unprofitable businesses, the company’s EBITDA has increased from $14m in Q400 to the current annual run rate of $100m.

IUSA is now a pure play information services and data processing company. The company compiles and updates a database of 14 million businesses and 250 million consumers in the United States and Canada. The company’s products and data processing services include the production of directories, business credit reports, and prospect lists; these are used by IUSA’s customers for activities such as identifying and qualifying prospective clients, initiating direct mail programs, and telemarketing.

Shown below are the company’s financials and valuation. I have annualized the company’s results for the six months ended 6/30/01. Balance sheet figures are as of 6/30/01.

(In Millions) 2001E
Revenue 290
EBITDA 100
EBITA 80 (incl. amort. of acquisition goodwill only)
Cash EPS(CEPS) $0.65 (amort. adjusted for tax)
# Shares 50.6

Mkt. Cap. 194
Cash 27
Debt 242
EV 409

EV/EBITDA 4.1X
P/CEPS 5.9X
Net Debt/EBITDA 2.2X

Pretax Return on Op Assets 36%
Pretax ROIC 26%

The company’s main competitor, Dun & Bradstreet (DNB), trades at 7.6X EBITDA and 16X forward earnings.

Other merits of the investment:
(1) Insiders have made significant purchases of IUSA stock. Since May 2000, the CEO has purchased about $3m worth @ $2.41-$6.44, and other insiders bought $700,000. (The CEO owns about 40% of the outstanding shares.)
(2) Free cash flow was $22.4m for the six months ended 6/30/01. On an annualized basis, that’s $44.8m or $0.89 per share. I have used the more conservative CEPS of $0.65 in valuing the company.
(3) Management estimates that about two-thirds of the company’s revenue is recurring.

My target valuation, based on a 6.0X EBITDA multiple, is $7.60 or double the current price. I believe the downside risk is near zero given the extremely low valuation, good ROIC , excellent free cash flow, ongoing reduction in debt, and renewed focus on the core business.

Risks: (1) The company went on a value-destroying acquisition spree starting in 1996. The last major acquisition was in July 1999. But management is now focused on reducing debt (which was taken on to finance the acquisitions) and on growing the core business.
(2) The CEO owns a travel agency that IUSA has been paying $1m-2m per year for “reimbursement” of travel expenses. I’m not sure how much self-dealing, if any, this may represent.
(3) Revenues for the six months ended 6/30/01 were down 9% because of the weakening economy. If the United States slips into recession, revenue may continue to decline. Offsetting some of that risk is the company’s gross margin of 72%, which should allow for further cost cutting initiatives. Furthermore, the current valuation allows for a large margin for error.

Catalyst

Renewed focus on the core business. Deleveraging of the balance sheet. Intrinsic value that is at least double the current price.