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Dun & Bradstreet: The Wrecking of a Balance Sheet


The crux of DNB's problem is that the company is not selling just a commodity, but a commodity whose price gets closer and closer to zero courtesy of the worldwide Web.

If you want to take a peek at how to destroy a balance sheet for the sake of propping up your stock price, look no further than Dun & Bradstreet (NYSE:DNB). The quarterly results were as ugly as I expected. In the face of a predictably withering business, the company is wasting its money buying back its stock near all-time highs. While its Q4 full balance sheet was not included in the press release, its long-term debt jumped $270 million, presumably from utilizing its revolver.

I'm not doctrinally against using debt to buy back stock (although I recognize that broad wisdom suggests it is not a good idea), but I find it a reckless exercise when it reduces a company to carrying almost $1.3 billion in debt vs. $149 million in cash, and some $1.25 billion in pension obligations to boot. And I certainly wouldn't describe the buybacks and the dividend as "rewarding" shareholders for their patience, as the CEO put it on the call. When a company buys back stock and/or issues dividends in excess of what it makes, it is called a "return of capital," not a "reward." And when borrowed money is repeatedly used for that, it is called a dumb idea. Anyway, that's clearly not how DNB management sees it, since they plan to continue bidding for their stock while guiding to a decline in operating income of 3-6% for 2013.

The question, of course, is, where the money for the remaining $400 million+ in buybacks come from. The company is guiding free cash flow to $270 million to $300 million for the year, or just about what it spent for buybacks in Q4 alone. That leaves the company its receivables, the balance of the revolver (approximately $220 million), and any additional debt it can pile on top of the existing mountain.

Finally, an observation on how DNB plans to get itself out of the current tailspin: Based on the comments on the call, DNB recognizes that competitors are coming at it aggressively on price, so it plans to differentiate itself based on "value" or --as the company describes it -- by doing analytics on the data. From what I've seen of DNB's reports, what the company calls "analytics" is little more than nice packaging with a few graphs. The crux of DNB's problem is that the company is not selling just a commodity (information), but a commodity whose price gets closer and closer to zero courtesy of the worldwide Web. Either DNB can find something else to sell, or this company is in deep, deep trouble.

Editor's Note: At Minyanville we often argue that markets and stocks are driven by four primary attributes: the fundamentals, the technicals, the structural, and psychology. In this weekly piece, trader Fil Zucchi will attempt to digest these four measures to come to actionable recommendations, but with a couple of twists: Rather than relying on standard technical analysis, he will examine the technicals through the lenses of "DeMark" indicators. And rather than highlighting straight entry and exit points for stocks, he will use options to gain long / short exposure, control risk, and generate cash flow. Investors should note: This column will be written 1-2 days prior to publication, so by the time it appears the prices of the securities mentioned may have changed.
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Position in DNB.
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