An Inquiry Into Journal Publications

An Inquiry Into Journal Publications

These enterprises are all owned and operated by Journal Communications (JRN), a media conglomerate that owns and operates the Milwaukee Sentinel as well as a number of other publications. If an investor is looking at JRN as a single continuing concern with five reportable business divisions, he or she is missing out on a lot of information about the company's seven companies and its component assets. In the following paragraphs, I will explain why this is the case. To put it another way, if Journal Communications were to split into seven independent public businesses, the aggregate market value of those firms would exceed JRN's present enterprise value by a wide margin. The total of the parts would be more valuable than the sum of the parts.

The enterprise value of Journal Communications is a little under $1 billion. Earnings for the owner, before taxes, are probably approximately $125 million. As a result, the pre-tax profit multiple of JRN's owner is eight. That's a steal at this price.

According to the Journal's calculations, the tax rate is 40%. a very high proportionUnder different ownership, the Journal's media assets would earn higher post-tax revenue. Tax savings would have a significant impact, but they would not be a main concern for anybody except a severely indebted buyer. If you're looking at Journal as a business, you should take the whole 40% tax cost into account. Owners' profits are reduced by $50 million as a result of these taxes.

The Journal's owner's profit yield is 7.5 percent, with an after-tax profit of $75 million and an enterprise value of $1 billion. Keep in mind that this is the net profit after taxes. The pre-tax profit margin is 12.5%. Pre-tax earnings should be used as a basis for comparison when assessing a firm. Last time I checked, the 30-year Treasury bond yielded 4.63 percent.Looking at the company's recent profits, it looks like JRN has a big safety net.

This is particularly true when you take into account that earnings yields give more protection against inflation than bond rates. They're not ideal, but they're better than nothing. Stocks, on the other hand, provide some hope that nominal cash flows may rise in tandem with inflation in the future. Bonds do not safeguard against inflation since their cash flows are set in nominal terms.

I do not utilize a discount rate of less than 8% when considering long-term investments like stocks. As a result, JRN's margin of safety has been greatly reduced. The Journal's margin of safety is now between 12.5% and 8%, rather than between 12.5% and 4.63 percent as previously stated. Is this level of safety adequate? Maybe.

My first consideration when assessing a potential investment is the possibility of suffering a large loss. What's the scale of things? How likely is it that something will happen? I use the term "catastrophic loss" to refer to any loss of primary that is irreversible. As a result of my need for a safety net, my risk of catastrophic loss is always larger than my risk of an overpriced company. There is no margin for error when it comes to a catastrophic loss.

Even if I make a lousy investment, I won't become bankrupt. Most mutual funds, for example, are lousy investments because they underperform their competitors. In most cases, however, the chance of a catastrophic loss is low for mutual funds. In reality, since they are strongly tied to the entire market, they have little danger of catastrophic loss.

Understanding this notion is easier when you think of valuation firms as writing insurance policies. No matter how often your expectations are exceeded, one bad decision may have far-reaching consequences if you aren't careful. It's not only a matter of how many errors you commit. It's also because they're so enormous.

It's possible to lose a significant amount of money investing in Google (GOOG). Journal Communications, for example, trades at a price that allows for only very tiny losses in principle. Journal Communications One should not forget about probabilities, however. If a Google shareholder suffers a catastrophic loss, how probable is it that this will happen? "I don't know." I'm not even willing to make a guess about what's going to happen next.

I'm prepared to put my neck on the line for Journal Communications.

It is my opinion that an investment in JRN has a minimal risk of principal loss compared to, for example, an investment in the S & P 500. Why? due to Journal Communications selling at a relatively low earnings multiple for the company's shareholders. However, this isn't the sole factor. The Journal should not be seen exclusively through the lens of a going business. The bulk of JRN is made up of properties that can be easily resold. It's worth noting that the JRN stock's assets are substantial:

Publishing

As the city's only major daily and Sunday newspaper, the Milwaukee Journal Sentinel has a wide readership. The Sunday edition of any Sunday newspaper in the top 50 U.S. markets has the greatest penetration rate (72 percent) of any Sunday edition. In the top 50 U.S. markets, the daily edition has the third-highest penetration rate (49%) of any daily newspaper. Daily readership is 240,000 and Sunday circulation is 425,000 for the publication.

In addition, the Milwaukee Journal Sentinel has three online presences. Advertising income is generated through JSOnline.com and OnWisconsin.com. There is a fee for access to PackerInsider.com.

A 1% drop in daily and Sunday circulation has taken place over the last three years. Despite the fact that full-run advertising linage has declined by a comparable amount, it seems that overall advertising has not decreased.

About $230 million is generated by the Journal Sentinel each year. The Journal Sentinel's income comes mostly from advertising, which makes up over 80 percent of its income (the other 20 percent is circulation revenue). Advertising income fluctuates seasonally, and it's possible that it's now higher than "average."

The Journal Sentinel's worth is difficult to assess since JRN considers the Journal Sentinel and its sister publications to be part of a single reporting segment. No matter how much I tried, I couldn't come up with a precise figure for the Journal Sentinel even if the figures were separated out.

Regardless, I can't see how the Journal Sentinel is worth less than $250 million or more than $500 million. In terms of money, I'd say the Journal Sentinel is worth anywhere between $250 million and $300 million. My best guess would be that it's conservative, but I don't know enough about newspapers to be certain. The fact that JRN does not separate the Journal Sentinel's figures from those of the local media further confuses matters. The Journal Sentinel, though, is worth at least $250 million.

The Journal Community Publishing Group of JRN is much more difficult to appraise. It comprises of 43 local newspapers, 41 retail magazines, and nine specialist periodicals (automotive, boating, etc.). In terms of revenue, the organization is worth roughly $100 million. My inability to find enough public information on community newspaper businesses, among other things, means I can't value this group independently of the Journal Sentinel. This is due to the previously mentioned lack of disclosure (combining the group with the Journal Sentinel for reporting purposes).

All I can do is make an informed estimate as to how much JRN's publishing firm is worth in total at this time. My best estimate for the value of the Journal Sentinel and the community newspapers is between $300 million and $500 million.

There are 38 radio stations owned by Broadcasting Journal Communications. WTMJ-AM Milwaukee, KMXZ-FM Tucson, KFDI-FM Wichita, and KTTS-FM Springfield are the most significant (MO). The top four radio stations in each of these markets are all represented here. Revenue from JRN's radio stations totals around $80 million.

Seven television stations are owned by Journal Communications. Nearly every one of these stations is among the top three in their respective markets. NBC, ABC, and Fox affiliates make up the majority of the stations. Milwaukee, Idaho, California, Michigan, and Nevada are all part of JRN's network of stations. Revenue from the Journal's television stations totals around $90 million.

Again, it's impossible for me to separate the significance of JRN's television and radio networks. I estimate their combined value to be between $250 million and $450 million.

In the Great Lakes area, Telecommunications JRN has a 3,800-mile network under its control. Norlight Telecommunications has a revenue of around $150 million. Because I'm unfamiliar with the telecom industry, I'm cautious about trying to assign a value to this segment. To put it another way, it can't be valued at less than $350 million.

Miscellaneous

Printing and direct marketing are two industries that have never appealed to me. There is nothing I can say about how much I appreciate them. However, they do generate income, so they may be of use to someone. These two companies make more than $100 million a year, but they aren't extremely lucrative.

Unsurprisingly, Real Estate JRN has a lot of unencumbered property. In most cases, these assets have a direct connection to one of JRN's operational enterprises. Real properties in the area cannot be sold while JRN is still in business. As a rough estimate, JRN appears to possess fewer than two million square feet, the majority of which is located in or around Milwaukee. I have no idea how much such a property is worth. Much of it has to do with day-to-day operations, as previously stated. Buildings in metropolitan settings, on the other hand, may sometimes be transformed to serve new purposes.

But it doesn't really matter. It seems doubtful that Journal Communications would ever sell these assets since the company is expected to continue operating for some time.

Valuation

So, what's the market value of JRN? It's difficult to tell. The company's present market value is estimated at $1 billion, which is well below its true potential. A reasonable estimate of 900 million dollars is based on my experience in publishing, broadcasting, and telecommunications companies alone. The figures you provided seem quite low to me. I can't arrive at a valuation for JRN's components that is less than $1.25 billion using more plausible estimations. If I do an intrinsic value study of the whole firm or apply some type of profits, sales, or EBITDA multiple to each business individually, the result is the same regardless of how I go about doing either.

In the range of $1.25 billion to $2 billion, the company, Journal Communications, is most likely worth. Because I'm gloomy about the newspaper industry, I'd guess at about $1.25 billion (which assumes slightly declining revenues). Any increase in revenue would have a significant impact on the stock's value. JRN is significantly cheap at present levels if growth of this magnitude is to be expected in the future. On the other hand, I doubt there will be any expansion at all.

Breaking up Journal Communications, which is the best option, will be difficult due to the company's voting structure. The local newspapers, TV stations, radio stations, and telecommunications companies should be spun out from JRN. It's also time to get rid of the printing and direct marketing companies. These are two completely distinct industries. Keeping them together makes little sense, while separating them makes plenty.

The obstacles faced by newspapers, radio, and television are all unique. Instead of being rewarded based on the success of a jumble of diverse media assets, they want distinct managers who have total control over capital allocation. If existing shareholders choose to sell their shares at a lower price, breaking JRN apart will make it simpler for them to do so.

In the event that these enterprises were publicly listed as five or six separate corporations, their aggregate market value would certainly exceed $1 billion. They may not even need to be exchanged on the open market. If JRN's properties were broken down into sensible groupings, there may be purchasers for these assets.

All of this, though, is quite unlikely. JRN is run by its employees (they maintain control through the ownership of shares with disproportionate voting rights). Nobody who wants to shake things up will invest in this firm since they won't be able to exert their influence. I can't think of a time when management hasn't had some encouragement from the outside.

Nearly nothing can go wrong with JRN. There seems to be nothing in the way of positive aspects to this. In order to appreciate the value in Journal Communications, it may take a long time for investors to reap the benefits. The investor who buys this kind of firm at this price is doomed to fail.

I have to concede that JRN is underappreciated from an objective standpoint. However, I'm not certain it's a bargain – and I'm confident there are better long-term investments.