1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
Barel Karsan
Barel Karsan

The Dolan Company: Monopoly Businesses

September 17, 2012 | About:

The Dolan Company (NYSE:DM) operates what appear to be several high-margin, monopoly-type businesses. And yet the company trades for a P/E of just 5! What gives?

Dolan runs a number of businesses including specialty publications (for various legal jurisdictions), litigation assistance (e.g. in the form of outsourced discovery) and foreclosure processing. In many cases, these businesses have moats that help the company generate strong margins. For example, the foreclosure business has fixed-price contracts with various law firms running out past the year 2020, while the niche publication business offers certain advertisers and subscribers the best way to access target markets and specialized information, respectively.

Be careful, however. Almost half of the company's revenue comes from processing mortgage foreclosures. Since it has been a very good few years in this business (government interference to reduce the number of foreclosures aside), revenues/earnings may have peaked as the housing market returns to normal, which could make one overestimate the company's earnings power based on its earnings in recent years.

Despite the high margins and monopoly-type businesses, however, Dolan generates rather unimpressive returns on capital. This apparent paradox unravels when you consider how Dolan has to come own the businesses under its domain. It didn't build them; it bought them! In so doing, it appears to have paid a premium, which makes margins look good but makes capital returns poor. For example, last year Dolan paid $68 million for a company that earned just $1.5 million from July (when Dolan took ownership) to December of 2011.

The good news is that none of these businesses are capital intensive. If revenues fall, it's likely pretty easy to cut costs (in the form of labour) in order to keep margins juicy. But the high-priced acquisitions are set to continue. Management is nothing if not honest, making it clear that the strategy is to grow. At the prices it pays for this growth, however, investors can probably do better elsewhere.

Disclosure: No position

About the author:

Barel Karsan
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now pre-order his book Invest Like a Guru on Amazon.

Rating: 3.5/5 (6 votes)


Please leave your comment:

GuruFocus has detected 5 Warning Signs with Dominion Midstream Partners LP $DM.
More than 500,000 people have already joined GuruFocus to track the stocks they follow and exchange investment ideas.

Performances of the stocks mentioned by Barel Karsan

User Generated Screeners

jont017Low Ebitda/EV
pbarker46PB & PS
jjcarlin99Utilities - non-regulated
jjcarlin99MidStream Oil & Gas
pbarker46EV/EBITDA & P/Med PS
pbarker46High short
Taekgyun Kopbr
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)