Trends Keep RH Donnelly a Hold

We rate the shares of R.H. Donnelley Corporation (RHD) a Hold following the release of first quarter 2008 financial results. The company continues to generate substantial cash flow, although we note that debt currently comprises more than 90% of total enterprise value. The company expects ad sales declines in the mid single-digits in 2008, and we project relatively flat EBITDA generation this year.

Given ongoing concerns about an economic slowdown, we remain cautious on shares of RHD. The shares currently trade at approximately 15.2x our 2008 EPS estimate.

In light of the number and magnitude of acquisitions in the company's recent past, we believe that valuation based on an EBITDA multiple is more appropriate in this situation. The shares presently trade at approximately 7.8x our projection for full-year 2008 EBITDA.

We note that this multiple represents a discount to the weighted average EBITDA multiple paid by RHD for its three major acquisitions of the last four years. The company paid multiples of 9x, 8.3x and 10.4x for its acquisitions of the Embarq (EQ) directory business in 2003, the AT&T (T - Analyst Report) directory business in 2004, and the Dex Media business in 2006, respectively. In light of the current economic environment, we believe that a discounted multiple, relative to previous acquisitions, is appropriate at this time.

In addition, the company's efforts to further establish its presence in the online local search business remain a work in progress, with the recent rollout of the DexKnows.com brand. We consider the success of these efforts to be highly important to the company's long-term success, and will monitor the company's progress going forward.

In light of the challenging economic conditions and a tight credit market, we believe that a Hold rating is appropriate at this time. Our price target of $8 per share equates to approximately 7.75x our 2008 EBITDA estimate.

Read the full analyst report on RHD.

Read the full analyst report on T.

Read the full analyst report on EQ.