One of the most amazing things about this market is that some stocks are not just cheap -- they're insanely cheap.

Right now, for instance, there's a stock trading at less than twice its trailing earnings. That's something you tend to see only after a significant one-time event or when earnings are about to fall off a cliff. But this company is also trading at less than twice its forward earnings. What's more, the earnings are bringing in cash -- and until recently, the company was paying out almost a 30% dividend.

The company I'm talking about -- the company that seems to be such an amazing deal -- is Idearc (NYSE: IAR).

The business
Idearc publishes approximately 1,200 different phone books in cities across the country. Advertising accounted for almost all of its $3.2 billion in sales last year. More than 90% of its revenues are from print advertising, with the remainder coming from the Internet, primarily Idearc's own website.

Publishing phone directories is a great business; it yields predictable monthly cash flows without requiring a lot of capital. And the quality of the business is reflected in the numbers. Last year, Idearc had impressive 42% operating margins, an amazing 25.7% return on assets, and capital expenditures of less than 2% of sales.

The market
However, phone books are also a declining business. The market is shrinking nationwide. Since 2003, Idearc's sales have dropped by 13%, and Idearc recently announced that it expects sales to decline by a "mid-single-digit percentage point." Over the same time period, the total number of business directories printed in a year has fallen from 15.1 billion to about 13 billion.

The problem isn't the direct competition -- Idearc has been successfully competing with Yellow Book, AT&T (NYSE: T), and R.H. Donnelley (NYSE: RHD) for years.

The real problem is the shift to the Internet. If you're looking for a business online, the odds are that you start that search with Google (Nasdaq: GOOG). If you're a bit eccentric, maybe you go to Yahoo! (Nasdaq: YHOO) or to Microsoft's (Nasdaq: MSFT) Live Search -- two companies that continue to offer improved solutions in this space.

Idearc's probably doesn't make it into the top 10 sites that you'd use, so online competitors are gradually devouring the company's primary market. And Google, Yahoo!, and Microsoft have barely begun focusing on local search, Idearc's bread and butter.

The valuation
Even with this worrisome trend, Idearc looks cheap by almost any standard measure. If you calculate Idearc's value using discounted cash flows, the stock could be worth up to $15 per share. Sure, the business is in a long-term decline, but even so, the stock is extremely cheap. And it's not as though the decline will happen overnight -- phone books will probably be common even 20 years from now.

With such a compelling valuation, you should look for hidden problems. Well, you'll see that in the past few months, both the CEO and CFO have left for other jobs, which is an obvious red flag. But there is a much bigger issue hiding in the financials.

The risks
That issue is Idearc's debt. The company was spun off from Verizon Communications (NYSE: VZ) in late 2006, and Verizon decided to saddle Idearc with more $9 billion in debt. Now, that's quite a sum -- almost triple the company's annual revenue. The interest on that debt alone cost the company $676 million in 2007, more than 1.5 times the company's net income.

What's more, Idearc doesn't have much flexibility to pay off its liabilities. Last year, the business generated $369 million in operating cash flows. It spent $46 million of that amount on capital expenditures, and it distributed $200 million in dividends to shareholders, leaving only $123 million for other purposes, such as paying off debt. However, the recent dividend elimination -- a prudent decision by management -- should give it a bit more space.

The current recessionary state could exacerbate the secular decline of the business and negatively affect Idearc's sales. That situation could potentially squeeze Idearc's cash flows, hurt the company's leverage ratios, and, thus, make it more difficult to refinance its debt at reasonable rates. Idearc does have some time. Its principal repayments are small -- but they are increasing. The company's first big debt repayments are $750 million due in 2013 and $4.5 billion in 2014.

The Foolish bottom line
Without the combination of negative growth and huge debt, Idearc would be a no-brainer of an investment. But with the debt, it becomes a question of whether, during a recession, management can stem the secular decline in the core business and exploit online growth opportunities. And it has to do that quickly enough that it can roll over its debt in five years.

Despite the uncertainty, the company doesn't have any short-term principal repayments that could trigger a meltdown. With the numbers we see, the stock could be a notable speculation.

Yet given the recent market volatility, the prices of many stocks have been driven down to extremely cheap levels. Right now, there are companies out there with the appreciation potential of Idearc but are in growing markets, with less debt and much less risk.

Our Motley Fool Inside Value investing service has found plenty of stocks that are safer than Idearc but still offer huge upside potential. You can read all about them with a 30-day free trial.

Fool contributor Richard Gibbons appreciates Idearc's contribution to reducing neck pain among computer users across America. He owns shares of Idearc but has no position in any of the other stocks discussed in this article. Microsoft is an Inside Value recommendation. The Fool's disclosure policy is not quite twice as thick as a phone book.