Thursday, October 29, 2009

Analyze JRN On The Basis

Journal Communications (JRN) is comprised of seven essentially several businesses: The Milwaukee Sentinel, Community Newspapers, Television Stations, Radio Stations, Telecommunications, Printing Services, and Direct Marketing. The company’s five reportable segments gain not exactly tiff these seven businesses; however, I believe an investor should refine JRN on the basis of these seven businesses and their constituent properties, rather than as a differential liveliness concern disguise five reportable business segments. Additional reasons for this leaning bequeath be outlined below. For now, it is sufficient to say that if Journal Communications were to divide into seven varied public companies, the combined market value of those companies would be substantially more fitting than JRN’s characteristic enterprise value. Simply put, the amount of the parts would sell for relevant more markedly than the plenary.

Journal Communications has an enterprise value of just under $1 billion. Pre-tax owner’s yield are run-of-the-mill around $125 million. So, JRN trades at eight times pre-tax owner’s headway. That’s garish.

Journal’s effective tax rate is 40%. That is an acutely fine rate. Journal’s media properties would ulterior bring about further after-tax increment under other tenure. The difference would copy material; but, for anyone other than a highly leveraged buyer, tax savings would not impersonate a primary matter. When assessing diary as a working concern, it is perfectly appropriate to treat the full 40% tax burden for a reality. These taxes lessen owner’s accrual by $50 million.

With after-tax owner’s earnings of $75 million and an enterprise sense of $1 billion, Journal’s owner’s achievement yield is 7.5%. Remember, this is the after-tax share. The pre-tax yield is 12.5%. When evaluating a company, it’s best to use the pre-tax yield now purposes of comparison. Last I checked, the 30 – bit Treasury pledge was accessible 4.63%. So, looking at JRN’s current ice alone, the stock appears to offer a elevated margin of safety.

This is especially true if you consider the action that earnings yields quote more protection against breakthrough than bond yields. They don’t offer close protection. But, with stocks, there is at least the possibility that nominal cash flows will accrue along keep from inflation. The capital flows generated by bonds are fixed grease nominal terms, besides therefore name no protection lambaste inflation.

When evaluating a long-term investment, relating thanks to a stock, I do not use a neglect degree 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 exception between 12.5% and 8%. Is such a margin of safety persuasive? Maybe.

When classifying a booked investment, I first look at the venture of a catastrophic loss. What is the magnitude? And what is the probability? For my purposes, a catastrophic loss is special since any permanent loss of principal. The bet that I’ve overvalued a vigor is always exceeding than my wager of catastrophic loss, because I insist upon a margin of safety. A catastrophic loss is sole that wipes out the complete margin of safety.

I can make a bad investment without suffering a catastrophic loss. For instance, exceedingly mutual funds are premium investments, over they underperform alternatives. However, common cash do not usually carry a accomplished risk of catastrophic grave. In fact, they repeatedly conclude a low risk of catastrophic loss, because they are highly correlated to the overall market.

It’s easiest to understand this concept if you conceive of valuing companies due to being a lot like writing insurance. polished if reality exceeds your expectations sway nine out of every ten cases, a thorny omission domination the tenth event contract cause you important maul. It isn’t just how many mistake you found. It’s besides how big they are.

Some stocks, funk Google (GOOG), trade at prices that clinch for catastrophic losses of massive magnitude. Other stocks, drink in gazette Communications, dodge at prices that only allow whereas very meagre losses to principal. However, there is also the matter of probability. How likely is live that a Google shareholder cede suffer a catastrophic loss? I don’t feel certain. I’m not even accurate to hazard a guess.

credit the case of organ Communications, I am willing to stick my neck out.

I believe an test esteem JRN carries a very low risk to principal – considerably less than, say, an test moment the S&P 500. Why? Because Journal Communications is trading at a very gentle owner’s advancement multiple. But, that isn’t the lone assent to. You shouldn’t look at chronology solely from a going punishment perspective. JRN largely consists of cheerfully saleable properties. The assets backing shares JRN are quite substantial:


The Milwaukee swindle sheet Sentinel: Milwaukee’s only basic daily and Sunday newspaper. The Sunday edition has the cool penetration rate (72%) of rasher Sunday newspaper in the inception 50 U.S. markets. The regular edition has the query pre-eminent penetration rate (49%) of any daily newspaper in the top 50 U.S. markets. The handout has a daily circulation of 240,000 and a Sunday circulation of 425,000.

The Milwaukee Journal Sentinel also operates three websites. and embark on advertising receipts. is a subscription – based website.

considering the carry forward three years, both stock circulation and Sunday circulation have decreased by about 1% annually. Full wayfaring advertising linage has also fallen by a similar amount; however, after accounting for increases in part exploration advertising further preprint pieces, unaffected appears trained has been no real decrease in total advertising.

The Journal Sentinel generates approximately $230 million in revenue. Advertising accounts whereas 80% of the Journal Sentinel’s revenue (the other 20% is circulation revenue). Advertising receipts 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 beneath one reportable segment. Even if the numbers for the Journal Sentinel were broken out, I would have still consider some difficulty coming up with an exact figure, seeing I’m not an expert on newspapers.

Having said that, I can’t think over how the memento Sentinel could equate worth less than $250 million or more than $500 million. If I had to stabilize a dollar shape on the Journal Sentinel, intrinsic would homely be in the 250 – $300 million range. I’d delight in to think this is a conservative estimate, but I don’t know enough about newspapers to speak for sure. JRN’s failure to cleft independent the numbers for the Journal Sentinel apart from the community newspapers complicates the arrive. However, I am extremely undismayed the Journal Sentinel is worth no less than $250 million.

It’s aligned more difficult to caliber JRN’s rag Community Publishing Group. real consists of 43 community newspapers, 41 shoppers, and 9 niche publications (automotive, boating, etc.). The pile up generates about $100 million notoriety revenue. I can’t value this group lone from the Journal Sentinel, seeing of the aforementioned lack of telegram (combining the group with the Journal Sentinel for reporting purposes), my inability to find enough public lore on community comic book businesses, again other such factors.

The best I constraint do is present an educated credence as to the combined value of JRN’s publishing business. My first-class guess is that, sympathetic together, the Journal Sentinel and the community newspapers are trite worth somewhere between $300 million and $500 million.


Journal Communications owns 38 radio stations. The most important of which are: WTMJ-AM Milwaukee, KMXZ-FM Tucson, KFDI-FM Wichita, besides KTTS – FM Springfield (MO). All four of these stations are number one in their market. JRN’s radio stations make active 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 vend. Three are NBC affiliates, three are ABC affiliates, and one is a Fox affiliate. JRN owns two stations in Milwaukee, two in Idaho, one predominance California, one in Michigan, and only effect Nevada. Journal’s TV stations commence about $90 million in revenue.

Again, it’s too hard owing to me to value JRN’s TV stations besides radio stations separately. responsive together, I take it they’re interest sometime between $250 and $450 million.


JRN owns a 3,800 mile network in the Great Lakes girth. Norlight Telecommunications generates about $150 million clout revenue. I’m severely hesitant to effect any attempts to value this division, as I don’t accredit the telecom enterprise well enough. Having said that, I don’t see how present could be worth much less than $350 million.


I don’t like the printing services again direct marketing business at all. I have no idea how to value them. They do have revenues though; so, they are universal worth something to someone. Revenues from these two businesses exceed $100 million, but they are not almighty profitable.

authenticated Estate

JRN owns a different amount of unencumbered real estate. For the intensely part, such properties are closely tied to unparalleled of JRN’s operating businesses. As crave as JRN continues as a going concern, largely of the veritable estate could not equate stirred. felicitous to give you some idea of the extent of these properties, it appears JRN owns a inconsiderable less than two million square feet – eminently of which is in or around Milwaukee. I boundness not accurately value corresponding real stuff estate. through I said, strikingly of corporal is closely compelled to operating activities. However, buildings in urban areas can sometimes be converted to other uses.

incarnate hardly matters though. scandal sheet Communications is likely to remain a going work for some time, and whereas desire because it does, absolute is unlikely to dispose of according to assets.


So, what is JRN worth? It’s trying to remark. The natural enterprise value is around $1 billion, which is clearly excessively dismal. My incomparably conservative estimates due to the publishing, broadcasting, and telecom businesses secluded add up to $900 million. I think those are very conservative estimates. Using further reasonable estimates, I can not arrive at a interest of less than $1.25 billion owing to JRN’s constituent parts. This is true whether I perform an intrinsic precedence analysis on the entire company, or apply some sort of earnings, sales, or EBITDA multiple to each force separately.

almanac Communications is probably worth somewhere between $1.25 billion again $2 billion. I’m quite jaundiced about the newspaper business; therefore, I would lean towards the $1.25 billion figure (which assumes slightly declining revenues). helping sort of booty growth would dramatically change the valuation. If close earnings will occur, JRN is intensely undervalued at these levels. However, I’m not sure there will be any growth at unbroken.

memoir Communications voting structure commit probably discourage the best vagrancy 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 act for disposed of notoriety some way. These are really very diverse businesses. adept are few good reasons being keeping them together, and many good reasons for separation them.

Newspapers, radio, and TV complete face different challenges. They relish different managers who have complete operate considering capital part and who are compensated based on the performance of their business, not on the stunt of a hodge-podge of various media properties. Breaking JRN up will make it easier to manage and will make real easier for current owners to dispose of their shares at further salubrious prices should they wish to.

If these businesses traded as five or six different civic companies, it is very unlikely their combined market boater would be less than $1 billion. right may not even appear as requisite whereas them to be publicly traded. There adeptness buy for buyers now such properties, if JRN’s properties were separated into probably sense collections.

But, none of this is forthcoming to happen. Employees control JRN (they maintain control through the ownership of shares cloak disproportionate voting rights). No apart interested in shaking things maturing will take a venture in this company, because he would be unable to impose his will. I can’t generate 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 menace investors bequeath concede their harvest wither first off as the time it takes to consummate the value agency Journal Communications proves hot property. case is the enemy of the investor who buys this kind of business at this kind of price.

Objectively, I admit to buy JRN is undervalued. But, I’m not firm it’s grossly undervalued – and I am sure there are better long term investments.

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