Journal Article Review (JRN) Analysis

 Journal Article Review (JRN) Analysis

The Milwaukee Sentinel, Community Newspapers, Telecommunications, Printing Services, Radio Stations, Television Stations, and The Milwaukee Sentinel are the seven main divisions that make up Journal Communications (JRN). Although these seven businesses do not precisely correspond to the company's five reportable segments, I think an investor would be better served by seeing JRN as a collection of these seven businesses and the assets that make them up, rather than as a single continuing concern with five reportable segments. Further justifications for this conviction will be detailed down below. Just to clarify, the current enterprise value of JRN is lower than the total market value of the seven public firms that would result from Journal Communications' division. To put it plainly, the individual components would be worth more than the total. 

A little under $1 billion is Journal Communications' enterprise value. The owner's earnings before taxes are likely to be close to $125 million. As a result, JRN is worth eight times the owner's pre-tax income. There's no asking price on that. 

A tax rate of 40% is applied to Journal. The rate is exceptionally high. Under new ownership, the media properties owned by the Journal would probably bring in more money after taxes. The disparity is substantial, but tax benefits aren't important to most people unless they're heavily indebted. It is reasonable to assume the full 40% tax burden while assessing Journal as a going concern. Earnings for the owner are cut by $50 million due to these taxes. 

The owner's profits yield for Journal is 7.5% with $75 million in after-tax earnings and a market value of $1 billion. This is the yield after taxes, in case you forgot. We get a yield of 12.5% before taxes. The pre-tax yield is the most useful metric to utilize when comparing different companies. The yield on the 30-year Treasury bond was 4.63 percent when I last looked. So, only based on current results, JRN stock looks to be a good bet. 

When compared to bond returns, earnings yields provide better protection against inflation, which further supports this claim. In terms of protection, they fall short. But at least with equities, you have a shot at getting nominal cash flows that rise with inflation. Bond income is not hedged against inflation because bond payments are nominally fixed. 

I always use a discount rate of at least 8% when assessing stocks and other long-term investments. This significantly lowers JRN's margin of safety. The Journal's margin of safety is 8% rather than 4.63%, which is an incorrect representation. Is that a sufficient margin of safety? Possibly yes.

I always consider the potential for a devastating loss when I am assessing a potential investment. How large is it? And how likely is it? In my view, any irretrievable loss of primary qualifies as a catastrophic loss. By requiring a buffer zone, I make sure that the possibility that I have overestimated a company's worth is always more than the possibility of a disastrous loss. When all buffers are exhausted, we have a catastrophic loss. 

I am capable of making a poor financial decision without incurring a devastating loss. As an example, the vast majority of mutual funds are poor investment choices due to their poor performance. Mutual funds, on the other hand, are not often fraught with the possibility of a disastrous loss. Actually, due to their great correlation to the market as a whole, they often carry a minimal chance of catastrophic loss. 

Comparing the process of appraising businesses to that of writing insurance will help you grasp this idea. Reality may surprise you 90% of the time, but a catastrophic error of judgment in that 10% of circumstances can still hurt you badly. What matters isn't merely the frequency of your errors. Their size is also a factor. 

Google (GOOG) is one of those stocks whose current pricing allows for massive, disastrous losses. The trading prices of other equities, such as Journal Communications, only permit extremely tiny losses to principle. Nevertheless, the issue of likelihood must also be considered. In what ways may a Google shareholder lose everything? You have no idea. Even taking a wild guess would be too much for me. 

I am prepared to take a stand on behalf of Journal Communications. 

In my opinion, the primary loss from investing in JRN is far lower than that of, example, the S&P 500. Why? Journal Communications is selling for a steal at its current owner's earnings multiple. Actually, there are other reasons as well. Looking at Journal from only a going concern standpoint is not a good idea. Properties that are easy to sell make up the bulk of JRN. Shares of JRN are backed by considerable assets:

The publishing

The Milwaukee Journal Sentinel is the sole major newspaper in Milwaukee that is published daily and on Sundays. Among Sunday newspapers published in the 50 largest U.S. areas, this one has the best penetration rate at 72%. Among the top 50 U.S. markets for daily newspapers, the one published every day has the third-highest penetration rate at 49%. On Sundays, 425,000 people read the paper, while on weekdays, 240,000 people do. 

Additionally, three websites are run by the Milwaukee Journal Sentinel. Ads bring in money for JSOnline.com and OnWisconsin.com. You need a subscription to access PackerInsider.com. 

There has been a 1% yearly decline in Sunday circulation and daily circulation over the past three years. While there has been a decline in full-run advertising linage, the decline in total advertising seems to be negligible when increases in part-run and preprint advertising are taken into consideration. 

About $230 million is the amount of money that the Journal Sentinel makes. Revenue for the Journal Sentinel comes from advertising at 80% and from circulation at 20%. Because of the cyclical nature of advertising revenue, it is possible that it is now higher than "normal" levels. 

The Journal Sentinel is hard to put a price on since JRN classifies it and its sister community newspapers as part of the same reportable segment. Because I am not an expert on newspapers, I would still have had trouble coming up with an exact figure, even if the figures for the Journal Sentinel were separated out. 

Still, I fail to perceive how the Journal Sentinel's value might fall anywhere between $250 million and $500 million. I would estimate that the Journal Sentinel is worth anywhere between $250 million and $300 million. To be honest, I don't know nearly enough about newspapers to say whether this is a conservative estimate or not. JRN's omission of Journal Sentinel data separate from that of community newspapers further muddies the waters. Having said that, I have no doubt the Journal Sentinel is worth $250 million. 

Valuing JRN's Journal Community Publishing Group becomes even more challenging. There are a total of 43 community newspapers, 41 consumer publications, and 9 specialty periodicals (such as those for boats, automobiles, etc.). Roughly $100 million is the amount of money that the group makes. Since I haven't been able to uncover enough public information on community newspaper enterprises, and because of the previously described lack of transparency (combining the group with the Journal Sentinel for reporting purposes), I am unable to place any value on this group apart from the Journal Sentinel. 

I can only make an informed guess as to how much JRN's publishing business is worth overall. If I had to guess, I'd say the combined value of the Journal Sentinel and the local papers is between $300 million and $500 million. 

Media transmission

A total of 38 radio stations are owned by Journal Communications. In particular, WTMJ-AM Milwaukee, KMXZ-FM Tucson, KFDI-FM Wichita, and KTTS-FM Springfield (MO) are quite significant. In their respective markets, each of these four stations ranks first. The radio stations owned by JRN bring in approximately $80 million annually.

News Corporation owns a total of seven television stations. The vast majority of these stations are in the top three in their respective markets. Out of them, three are affiliated with NBC, three with ABC, and one with Fox. JRN owns a total of six radio stations across the US, including two in Idaho, one each in California, Michigan, and Nevada. About $90 million is the revenue generated by Journal's television channels.

The inability to disentangle the worth of JRN's television and radio stations is a persistent problem for me. Their combined value, in my opinion, is $250 million to $450 million.

Communication services

Within the Great Lakes area, JRN possesses a network that extends 3,800 miles. Approximately $150 million is the revenue that Norlight Telecommunications brings in. Due to my lack of expertise in the telecom industry, I am quite reluctant to try to assign a value to this segment. However, I fail to perceive any way that its value could be significantly lower than $350 million. 

Other than that

The direct marketing and printing industries are completely unappealing to me. They are valuable, but I don't know how much. But, they do generate income, so they must be valuable to someone. These two companies bring in more than $100 million, but they're losing money. 

Housing Market

It's surprising how much freehold property JRN owns. These properties are typically associated with one of JRN's core operations. Much of the property would remain unsellable so long as JRN is a going company. To give you a sense of the scope of these facilities, JRN seems to own just under two million square feet, with a significant portion of them located in or around Milwaukee. Such real estate is beyond my valuation capabilities. Much of it, as I mentioned before, is related to operational tasks. Nevertheless, there are instances where urban buildings can be repurposed. 

Yet, it is of little consequence. Assuming Journal Communications continues to operate for the foreseeable future, it will most likely hold on to these assets.

Valuation

What does JRN now cost? It's not easy to tell. The present enterprise value of about $1 billion is obviously inadequate. The publishing, television, and telecom industries alone add up to $900 million, according to my most conservative estimations. In my opinion, those are the most cautious projections. I am unable to arrive at a value for the components of JRN lower than $1.25 billion using more plausible estimations. This holds true regardless of whether I evaluate the entire firm using an intrinsic value analysis or I evaluate each business independently using a sales, earnings, or EBITDA multiple. 

An estimate places Journal Communications' value between $1.25B and $2B. Since I have a very negative outlook on the newspaper industry, I would put my money on the $1.25 billion number (which accounts for slightly falling revenues). The valuation would be significantly affected by any increase in revenue. At present prices, JRN is grossly undervalued if this growth actually materializes. But I seriously doubt there will be any progress. 

The voting system at Journal Communications is likely to make dismantling the company seem like the worst option. It would be wise for JRN to separate its telecommunications company, television stations, radio stations, and community newspapers. It is also necessary to find a solution for the printing services and direct marketing companies. In reality, these are two very separate industries. There are numerous valid arguments in favor of splitting them apart, but very few in favor of keeping them united. 

Media such as newspapers, radio, and television encounter unique obstacles. Instead of basing compensation on the success of a mishmash of media outlets, they should hire separate managers with full authority over capital allocation and pay them according to their company's performance. To make things easier to administer and give present owners an easier way to sell their shares at better prices if they choose to, JRN should be broken up. 

Combine the market caps of these companies and it's highly improbable that they would be less than $1 billion if they were five or six separate public corporations. Their listing on a public stock exchange might not even be required. Dividing JRN's properties into collections based on common sense can attract purchasers. 

Nothing here, though, is likely to materialize. Employees have a disproportionate amount of voting power in the company and so control JRN. Nobody who wants to raise a stir will buy into this company since he can't be bothered to make his will known. I fail to see management ever attempting such a massive undertaking without external encouragement. 

JRN is practically risk-free. Furthermore, it appears to lack any redeeming qualities. As the time it takes to realize the value in Journal Communications becomes more expensive, investors run the risk of seeing their gains dwindle. The investor who purchases such a business at such a price is beset by the passage of time. 

Taking a step back, I can see that JRN is underappreciated. However, I'm not certain it's extremely cheap, and I'm certain there are better investments for the long run.

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