An Analysis of the Journal Register Company (JRC)
Let me begin with some of the eye - catching metrics that might
lead an investor to consider purchasing shares of the Journal
Register Company (JRC). This newspaper company has a price - to
- earnings ratio of 11.3, a price - to - sales ratio of 0.93, a
5 year average return on capital of 17.6%, and a five year
average pre-tax profit margin of 27.4%.
Now, for the bad news. The Journal Register Company has an
enterprise value - to - EBITDA ratio of 9.07 and an enterprise
value - to - revenue ratio of 2.24. Obviously, this company is
carrying a lot of debt. So, perhaps the multiples on the common
stock price are deceptive.
Before I go any further, let me take a moment to point out the
fact that, in the case of Journal Register, the shares you buy
are literally common stock; that is, the security is common to
all owners. This is a rarity in the publishing business, where
families often maintain control of their newspapers via
ownership of a class of stock with (much) greater voting rights.
So, how should an investor value the Journal Register Company?
Should he use JRC's market cap or its enterprise value? I have
usually encouraged a full and careful consideration of all debt
when making any investment. In the case of JRC, such debt makes
up a large portion of the company's enterprise value. Is it
really best to lump the debt and equity together to determine
the true price Journal Register is selling for?
I think it is.
There are situations in which the leverage inherent in a debt -
heavy capital structure works to the benefit of the common stock
holder. The most obvious example is a highly leveraged, growing
company selling at a bargain price. The increase in earnings is
amplified by the fixed debt, because the debt creates a sort of
break even point, much like a traditional fixed cost. Just as
greater production can give tremendous benefits to the owner of
a large plant, or greater sales can give tremendous benefits to
the owner of a large store, greater pre-tax earnings before
interest charges can give tremendous benefits to the owners of
common stock.
Does this scenario apply to Journal Register? Perhaps, but I
don't think so. Long - term, the economics of the newspaper
business will likely be quite poor. Even for Journal Register's
properties, I am projecting a fall in circulation with no end in
sight. Some may disagree with this assessment. However, I
believe they are being overly optimistic. Past performance is
only a good estimate of future performance insofar as the future
resembles the past. I believe the future of newspaper publishing
will be sufficiently different from the past to render any
estimate of Journal Register's future performance based solely
on its past performance quite inaccurate. So, for the most part,
the leverage inherent to Journal Register's capital structure
will likely be working against the long - term investor.
Economically, Journal Register's assets are encumbered. The
legal reality is immaterial to the shareholder. The company can
not sell of its assets without either paying off its debt or
maintaining control over sufficient free cash flow to meet its
obligations. Today, money is cheap. It may not be so cheap in
the future. Journal Register is insulated from interest rate
changes on its current borrowings. However, the company can not
guarantee that, if it were refinance its debt as it came due,
interest charges would remain as low as they are today. This is
true for every business, but it takes on greater importance in
the case of the Journal Register Company, because of the
company's debt heavy capital structure, today's historically low
interest rates, and the likely future trend of newspaper
circulation.
Together, these three factors form a kind of perfect storm. But,
it is important that the facts be assessed calmly. There is no
need for exaggeration. The Journal Register Company is not in
any grave peril. There would be no risk of insolvency, if the
company did not borrow further, and committed its substantial
free cash flow to paying down its debt. A look to the recent
past suggests the company is unlikely to follow such a
conservative course. That is not necessarily a bad thing.
There may be value in future acquisitions. In fact, the current
climate is perfect for making acquisitions that truly add value
to the company. But, other companies with operations capable of
regularly generating lots of free cash flow have sometimes found
themselves in financial difficulties, because of an overly
ambitious capital structure and reduced profitability within
their chosen industry. I am not suggesting the Journal Register
Company will find itself in such a position. If it is well -
managed, there is no reason for Journal Register to face such
peril. But, it is rarely wise to assume a company will be well -
managed.
The problem with the Journal Register Company as an investment
is not the risk created by its debt. It is easy to overstate
that risk. The problem is the price. The Journal Register
Company is not as cheap as it appears to be. Newspapers will not
be going the way of the Dodo anytime soon, but they are already
in decline. This decline will not be reversed.
Investors need to remember the importance of growth. Newspapers
are not growing. There is no need to chase stocks with lofty
multiples merely to acquire some short - lived hyper growth.
But, there is a need to avoid companies that will not grow their
earnings. There are many stocks trading at higher P/E ratios
than JRC that are, in fact, better bargains.