Some of you know of Lee Enterprises (NYSE:LEE). Many do not. Please do not be frightened by the next word. Newspaper! Yes, Lee Enterprises is a newspaper. It has some long term debt issues that need resolution. Specifically, $1 billion in long term debt that matures in April, 2012.
Lee is in a misunderstood industry that many term dead. Whenever someone is asked about the future of newspapers, the frequent response is that it is a horrible investment. When asked why, the common retort is simply that print is dead. People just repeating what the mass media has pounded into everyone’s heads. What I encourage everyone to do is read the reports and other available data from Lee and its competitors. Doing so will probably cause one to draw a different conclusion in just a handful of hours. Lee's investor relations page can be found here.
Lee has a few things that a value investor may like. It's financial statements are mostly attractive other than long term debt numbers that are a bit high. That is discussed later. What most miss is that it can be argued that Lee has a moat. When it comes to local news, this is not something major outlets (CNN, Fox News, CNBC, etc) cover. If you want local news in print, you need your local paper. The moat is not as great as it was 20 years ago but the moat is still there. The moat is in the local reporter reporting on your local high school sports teams. On recent weather in the area. On news of the local factories hiring or laying off. Listings for local apartment rentals. Ads for local businesses like the hardware store. The list of things that local news can provide that national news can not is endless. That is the moat that Lee has.
Also, many newspapers including Lee are creating or have created apps for various digital media devices such as the iPad and iPod and are experimenting with pay for content models within those devices. When thinking about tech and media, please remember that digital distribution is in its infancy. Digital media devices are very immature right now as is the level of knowledge in using those devices to generate revenue. In 10 years media devices will probably be of such a form due to maturing models that no one could have imagined them today. And as such, newspapers will mature in lock step and have a better understanding of how to survive in the era of digital media. While the future is not known, the possibilities both good and bad are endless. Print is a smaller foot print in Lee's business these days but the potential for Lee to make more money digitally is there.
Knowing all of this, Lee has gotten killed over the past month. It is down from about $2.80 a month ago to a close today of $1.17. it even dropped below $1 for a few hours. Mostly due to fears that the $1 billion in debt that matures in less than one year will not be refinanced. A deal was in place but Lee appears to have walked away from the deal due to unfavorable terms that Lee views as being caused by bad timing. The deal included new long term debt with 9% and 11% interest rates so this is understandable. These rates are much higher than that of the current debt structure. Lee currently has revenues of about $750 million a year and produces $100 million in Free Cash Flow.
Which leads to the CEO buying 100,000 shares. Lee's CEO has also recently purchased 100,000 of the 39.2 million shares outstanding (0.25% of all shares) which is encouraging. The future is not as dim as many think. The CEO also said the following in a recent letter to shareholders (May 5, 2011):
Dear Lee Stockholder:
As you may have seen in news reports, Lee has decided not to proceed at this time with our recently proposed private placement of bonds and stock totaling $1.055 billion as a way of refinancing our long-term debt.
In deciding to withdraw the proposed offerings, we concluded that market conditions were not sufficiently favorable at this time, primarily in light of recent bumps in the economy and a slowdown in revenue recovery for the industry and Lee. Perhaps because of these economic uncertainties, potential investors sought terms and conditions we believe were not in the best interest of Lee or its stockholders.
Refinancing our debt remains among our highest priorities. We will continue to pursue alternatives and fully expect to refinance our long-term debt before it matures in April 2012. We believe opportunities will improve in the coming months as our local economies regain steam and our revenue trend again turns upward. In the meantime, we continue to drive substantial cash flow and pay down debt rapidly. We are not, as some in the national media have imagined, staving off bankruptcy.
Valuation wise, Lee has a market cap of $46 million right now. After debt restructuring, it is reasonable to think that Lee should be able to make over $20 million in FCF if not $100 million if the economy improves further. Lee has positive shareholder equity so to take a conservative view of value and simply say that Lee is worth 8x FCF or 8x $20 million, this $46 million market cap that currently has positiver free cash flow is potentially worth north of $160 million with 39.2 million shares. Lee has mentioned that share dilution is an option and the numbers tossed around hinted at 25% share dilution. So assuming share dilution would cause there to be 50 million shares, Lee is probably worth more than $3.20 per share ($160 million / 50 million shares) assuming that the debt refinancing does occur.
John Rogers is the only guru holding Lee. Rogers owns 7,437,607 shares (19% of all shares outstanding) as of 12/31/2010, an increase of 31.67% from the previous quarter. This position accounts for 0.34% of the $5.32 billion portfolio of Ariel Capital Management.
DISCLOSURE: The author of this article own LEE.
- CEO Buys, CFO Buys: Stocks that are bought by their CEO/CFOs.
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