An Analysis of Journal Communications (JRN)
Journal Communications (JRN) is comprised of seven essentially
separate businesses: The Milwaukee Sentinel, Community
Newspapers, Television Stations, Radio Stations,
Telecommunications, Printing Services, and Direct Marketing. The
company's five reportable segments do not exactly match these
seven businesses; however, I believe an investor should analyze
JRN on the basis of these seven businesses and their constituent
properties, rather than as a single going concern with five
reportable business segments. Additional reasons for this belief
will be outlined below. For now, it is sufficient to say that if
Journal Communications were to divide into seven separate public
companies, the combined market value of those companies would be
substantially greater than JRN's current enterprise value.
Simply put, the sum of the parts would be valued more highly
than the whole.
Journal Communications has an enterprise value of just under $1
billion. Pre-tax owner's earnings are probably around $125
million. So, JRN trades at eight times pre-tax owner's earnings.
That's cheap.
Journal's effective tax rate is 40%. That is an unusually high
rate. Journal's media properties would likely generate more
after-tax income under different ownership. The difference would
be material; but, for anyone other than a highly leveraged
buyer, tax savings would not be a primary consideration. When
evaluating Journal as a going concern, it is perfectly
appropriate to treat the full 40% tax burden as a reality. These
taxes reduce owner's earnings by $50 million.
With after-tax owner's earnings of $75 million and an enterprise
value of $1 billion, Journal's owner's earnings yield is 7.5%.
Remember, this is the after-tax yield. The pre-tax yield is
12.5%. When evaluating a company, it's best to use the pre-tax
yield for purposes of comparison. Last I checked, the 30 - year
Treasury bond was yielding 4.63%. So, looking at JRN's current
earnings alone, the stock appears to offer a large margin of
safety.
This is especially true if you consider the fact that earnings
yields offer more protection against inflation than bond yields.
They don't offer perfect protection. But, with stocks, there is
at least the possibility that nominal cash flows will increase
along with inflation. The cash flows generated by bonds are
fixed in nominal terms, and therefore offer no protection
against inflation.
When evaluating a long-term investment, such as a stock, I do
not use a discount rate of less than 8%. This reduces JRN's
margin of safety considerably. Instead of being the difference
between 12.5% and 4.63%, Journal's margin of safety is the
difference between 12.5% and 8%. Is such a margin of safety
sufficient? Maybe.
When evaluating a prospective investment, I first look at the
risk of a catastrophic loss. What is the magnitude? And what is
the probability? For my purposes, a catastrophic loss is defined
as any permanent loss of principal. The risk that I've
overvalued a business is always greater than my risk of
catastrophic loss, because I insist upon a margin of safety. A
catastrophic loss is one that wipes out the entire margin of
safety.
I can make a bad investment without suffering a catastrophic
loss. For instance, most mutual funds are bad investments,
because they underperform alternatives. However, mutual funds do
not usually carry a high risk of catastrophic loss. In fact,
they generally have a low risk of catastrophic loss, because
they are highly correlated to the overall market.
It's easiest to understand this concept if you think of valuing
companies as being a lot like writing insurance. Even if reality
exceeds your expectations in nine out of every ten cases, a
terrible misjudgment in the tenth case can cause you great harm.
It isn't just how many mistake you make. It's also how big they
are.
Some stocks, like Google (GOOG), trade at prices that allow for
catastrophic losses of considerable magnitude. Other stocks,
like Journal Communications, trade at prices that only allow for
very small losses to principal. However, there is also the
matter of probability. How likely is it that a Google
shareholder will suffer a catastrophic loss? I don't know. I'm
not even willing to hazard a guess.
In the case of Journal Communications, I am willing to stick my
neck out.
I believe an investment in JRN carries a very low risk to
principal - considerably less than, say, an investment in the
S&P 500. Why? Because Journal Communications is trading at a
very modest owner's earnings multiple. But, that isn't the only
reason. You shouldn't look at Journal solely from a going
concern perspective. JRN mainly consists of readily saleable
properties. The assets backing shares JRN are quite substantial:
Publishing
The Milwaukee Journal Sentinel: Milwaukee's only major daily and
Sunday newspaper. The Sunday edition has the highest penetration
rate (72%) of any Sunday newspaper in the top 50 U.S. markets.
The daily edition has the third highest penetration rate (49%)
of any daily newspaper in the top 50 U.S. markets. The paper has
a daily circulation of 240,000 and a Sunday circulation of
425,000.
The Milwaukee Journal Sentinel also operates three websites.
JSOnline.com and OnWisconsin.com generate advertising revenue.
PackerInsider.com is a subscription - based website.
Over the last three years, both daily circulation and Sunday
circulation have decreased by about 1% annually. Full run
advertising linage has also fallen by a similar amount; however,
after accounting for increases in part run advertising and
preprint pieces, it appears there has been no real decrease in
total advertising.
The Journal Sentinel generates approximately $230 million in
revenue. Advertising accounts for 80% of the Journal Sentinel's
revenue (the other 20% is circulation revenue). Advertising
revenue is somewhat cyclical, and may currently be above
"normal" levels.
It's difficult to value the Journal Sentinel, because JRN places
the Journal Sentinel and its community newspapers under one
reportable segment. Even if the numbers for the Journal Sentinel
were broken out, I would have still have some difficulty coming
up with an exact figure, because I'm not an expert on
newspapers.
Having said that, I can't see how the Journal Sentinel could be
worth less than $250 million or more than $500 million. If I had
to put a dollar figure on the Journal Sentinel, it would
probably be in the 250 - $300 million range. I'd like to think
this is a conservative estimate, but I don't know enough about
newspapers to be sure. JRN's failure to break out the numbers
for the Journal Sentinel apart from the community newspapers
complicates the issue. However, I am quite confident the Journal
Sentinel is worth no less than $250 million.
It's even more difficult to value JRN's Journal Community
Publishing Group. It consists of 43 community newspapers, 41
shoppers, and 9 niche publications (automotive, boating, etc.).
The group generates about $100 million in revenue. I can't value
this group apart from the Journal Sentinel, because of the
aforementioned lack of disclosure (combining the group with the
Journal Sentinel for reporting purposes), my inability to find
enough public information on community newspaper businesses, and
other such factors.
The best I can do is offer an educated guess as to the combined
value of JRN's publishing business. My best guess is that, taken
together, the Journal Sentinel and the community newspapers are
probably worth somewhere between $300 million and $500 million.
Broadcasting
Journal Communications owns 38 radio stations. The most
important of which are: WTMJ-AM Milwaukee, KMXZ-FM Tucson,
KFDI-FM Wichita, and KTTS - FM Springfield (MO). All four of
these stations are number one in their market. JRN's radio
stations generate about $80 million in revenue.
Journal Communications owns seven television stations. Almost
all of these stations are ranked as one of the top three in
their market. Three are NBC affiliates, three are ABC
affiliates, and one is a Fox affiliate. JRN owns two stations in
Milwaukee, two in Idaho, one in California, one in Michigan, and
one in Nevada. Journal's TV stations generate about $90 million
in revenue.
Again, it's too hard for me to value JRN's TV stations and radio
stations separately. Taken together, I believe they're worth
somewhere between $250 and $450 million.
Telecommunications
JRN owns a 3,800 mile network in the Great Lakes region.
Norlight Telecommunications generates about $150 million in
revenue. I'm very hesitant to make any attempts to value this
division, because I don't understand the telecom business well
enough. Having said that, I don't see how it could be worth much
less than $350 million.
Miscellaneous
I don't like the printing services and direct marketing business
at all. I have no idea how to value them. They do have revenues
though; so, they are probably worth something to someone.
Revenues from these two businesses exceed $100 million, but they
are not very profitable.
Real Estate
JRN owns a surprising amount of unencumbered real estate. For
the most part, such properties are closely tied to one of JRN's
operating businesses. As long as JRN continues as a going
concern, much of the real estate could not be sold. Just to give
you some idea of the extent of these properties, it appears JRN
owns a little less than two million square feet - much of which
is in or around Milwaukee. I can not accurately value such real
estate. As I said, much of it is closely tied to operating
activities. However, buildings in urban areas can sometimes be
converted to other uses.
It hardly matters though. Journal Communications is likely to
remain a going concern for some time, and as long as it does, it
is unlikely to dispose of such assets.
Valuation
So, what is JRN worth? It's hard to say. The current enterprise
value is around $1 billion, which is clearly too low. My most
conservative estimates for the publishing, broadcasting, and
telecom businesses alone add up to $900 million. I think those
are very conservative estimates. Using more reasonable
estimates, I can not arrive at a value of less than $1.25
billion for JRN's constituent parts. This is true whether I
perform an intrinsic value analysis on the entire company, or
apply some sort of earnings, sales, or EBITDA multiple to each
business separately.
Journal Communications is probably worth somewhere between $1.25
billion and $2 billion. I'm quite pessimistic about the
newspaper business; therefore, I would lean towards the $1.25
billion figure (which assumes slightly declining revenues). Any
sort of revenue growth would dramatically change the valuation.
If such growth will occur, JRN is extremely undervalued at these
levels. However, I'm not sure there will be any growth at all.
Journal Communications voting structure will probably discourage
the best course of action: breaking up the company. JRN should
spin off the community newspapers, the TV stations, the radio
stations, and the telecom business. The printing services and
direct marketing businesses should also be disposed of in some
way. These are really very different businesses. There are few
good reasons for keeping them together, and many good reasons
for separating them.
Newspapers, radio, and TV all face different challenges. They
need different managers who have complete control over capital
allocation and who are compensated based on the performance of
their business, not on the performance of a hodge-podge of
various media properties. Breaking JRN up will make it easier to
manage and will make it easier for current owners to dispose of
their shares at more favorable prices should they wish to.
If these businesses traded as five or six different public
companies, it is very unlikely their combined market cap would
be less than $1 billion. It may not even be necessary for them
to be publicly traded. There might be buyers for such
properties, if JRN's properties were separated into common sense
collections.
But, none of this is likely to happen. Employees control JRN
(they maintain control through the ownership of shares with
disproportionate voting rights). No one interested in shaking
things up will take a stake in this company, because he would be
unable to impose his will. I can't imagine management ever
embarking on such a sweeping venture without some prodding from
the outside.
JRN has almost no downside. Sadly, it doesn't seem to have a lot
of upside either. There is a real danger investors will see
their returns wither away as the time it takes to realize the
value in Journal Communications proves costly. Time is the enemy
of the investor who buys this kind of business at this kind of
price.
Objectively, I have to admit JRN is undervalued. But, I'm not
sure it's grossly undervalued - and I am sure there are better
long term investments.