The investment thesis for A. H. Belo is simple. The company has no debt, $70 million of excess real estate and $40 million of cash in the bank.
In addition, the company owns a number of profitable newspapers (profitability has recently been obscured by the way the company deals with its legacy pension liabilities) and a stake in a fast-growing and extremely profitable company called Classified Ventures LLC.
A. H. Belo (NYSE:AHC) has 22 million shares trading on the NYSE at $5.35 for a market cap of $115 million.
I believe each share of A. H. Belo represents a collection of assets worth more than $10.
Business and History
In 1842, George H. French began printing the "Daily News" in Galveston. At the time, Samuel Houston was president of the Republic of Texas. Galveston was its largest port and primary city.
Alfred Horatio Belo joined the Daily News, and became majority owner of the company in 1865. The next year he sends George Bannerman Dealey north to select a location for a sister newspaper. Dealey chooses Dallas and founds the Dallas Morning News.
Dealey's prominence grows along with Dallas and its newspaper. In 1920 he becomes president of the company. He takes advantage of a new medium that is sweeping the world: radio. In 1922, WFAA goes on the air as the Dallas Morning News' radio service.
1923 - the company sells its interest in the original Galveston Daily News, focusing its operations entirely on the Dallas Morning News. Today, the Daily News is owned by the Carmage B. Walls family.
1926 - Dealey acquires a majority interest in the company from Belo's heirs with his partner John F. Lubben. The company is renamed A.H. Belo Corporation after Dealey’s late mentor.
1950 - Belo acquires KBTV, and becomes one of the first television broadcasting companies.
A.H. Belo Corporation becomes a public company in 1981 with James M. "Jimmy" Moroney Jr. at the helm. Moroney played a critical role in converting Belo from the privately held company founded by his grandfather, George Bannerman Dealey, into a publicly traded media company.
Moroney joined The Dallas Morning News in 1946 as a reporter. Upon his retirement in 1986, he hands the reins to Robert W. Decherd who heads the company today.
Decherd, a great-grandson of Dealey, finally settles war between Dallas’ two main Newspapers. During the worst recession in decades, the Dallas Morning News boosts its circulation. In due course, circulation doubles that the Times-Herald. On Dec. 9, 1991, after 112 years in operation, the Dallas Times-Herald published its last issue.
1997 - Belo acquires The Providence Journal Company. The deal includes nine television stations along with the Providence Journal, the oldest newspaper in the U.S.
2001 - The newspaper and television websites of Belo Corp. join Classified Ventures LLC. Classified Ventures is a partnership to help newspapers expand their position - using internet technologies - as the nation's leading suppliers of classified advertising.
2008 - The company's board of directors agree to split the business. The newspaper business is spun out. CEO Decherd, becomes CEO of the “new” company (NYSE:AHC). Belo Corp. (BLC) becomes a pure-play television company.
Buffett tells the CEOs of each company he buys to run the business as if:
• They owned 100% of it
• It is the only asset their family owns or will ever own
• It can’t be sold or merge for at least a hundred years
Robert Decherd has been CEO for as long as anyone cares to rememeber. Decherd is also a director of Kimberly-Clark Corporation and serves on the Advisory Council for the Center for Ethics at Harvard University. Decherd manages the company with James M. Moroney III. Moroney currently serves as publisher and chief executive officer of The Dallas Morning News.
Moroney began his career with Belo as a sales trainee. In 1997, Moroney assumed responsibility for the operations of all of Belo's television stations in 15 markets across the U.S. He was later named executive vice president of Belo (BLC), with responsibility for finance, treasury and investor relations.
Since the split of the company in 2008, Decherd has been selling his Belo Corp. stock (BLC). He has been buying A. H. Belo (NYSE:AHC) stock. That’s remarkable given that he and his family already have most of their net worth tied up in the company. Decherd and his sister, together, own some $ 20 million worth of stock. This is many multiples of Decherd's annual salary. He's buying more!
In short, if I owned this company outright, I would want these people to run it for me.
In 2010, A. H. Belo came to an agreement with Belo Corp. to split the shared retirement pension plan into separately sponsored plans. The company ended up with a pension plan that was underfunded to the tune of $145 million. Since then, the company has paid significant discretionary contributions to the fund of $30 million in 2011 and roughly $20 million in 2012. These contributions were in addition to the regular pension expenditures.
Putting the legacy pension liabilities to rest is both tax-efficient and ethical from an owner's perspective. Having said that, it does temporarily depress (operating) income.
Management has described three uses of excess cash:
1) Pension contributions
In conjunction with the dividend policy announced in 2011, the company amended their revolving credit facility to allow for dividends and share repurchases without restriction. The board has recently approved stock buybacks.
AHC competes with McClatchy, Lee and E. W. Scripps. Unlike its peers, the company isn’t leveraged to the hilt.
1) Dual Class Share Structure: Management holds approximately 52 percent of the voting power through Series B stock which has 10 votes per share.
2) Circulation is plummeting. This is unlikely to change anytime soon given the plethora of "news" offered for free all over the Internet.
As it is, roughly half of earnings on a look-through basis come from Internet advertising. From an owners perspective, any further decline of newspaper advertising revenues has been hedged by the part ownership of Classified Ventures LLC. The quality of the business and the stability of future cash flows is better than one would assume just by looking at the income statement.
A. H. Belo owns a significant real estate portfolio which it is currently monetizing. All of the properties are owned outright, without any mortgages. Management has commented that it will not sell the assets at fire sale prices. The assets currently for sale are estimated to have market values of $70 million => $3 per share.
The company has $40 million of cold cash and no debt => $2 per share
In 2011, Classified Ventures LLC paid $50 million in dividends. Of this, AHC received $2.5 million. This means AHC’s economic interest in Classified Ventures is roughly 5%.
-EDIT- Based on now released 2012 10-k, I've adjusted my estimate of AHC's stake down to 3.3%. In my original analysis I failed to adjust for the fact that CV retained some of the dividends to one of its owners at the request of that owner.
As discussed here, I believe Classified ventures LLC is worth at least $1 billion => $1.65 per share.
I add back the voluntary pension contributions and look-through earnings of Classified Ventures LLC to FCF as reported to get an estimate of owner earnings. As always, I check for sanity by looking at what the IRS says.
From an owner's perspective, the company generates earnings of $11 million => EPS of $0.50.
On average, A. H. Belo pays about $3 million of income tax. This implies the IRS sees earnings of roughly $12 million after otherwise taxable voluntary pension fund contributions. => EPS of at least $0.50
I would pay $150 million to own A. H. Belo in a heartbeat. A private buyer could saddle the company with $200 million in debt and pay himself a dividend of $10 per share in weeks. This would still leave the company better capitalized than many of its publicly traded peers.
In short, if you back out the value of the real estate and Classified Ventures LLC, you get the money for nothing and the oldest newspaper in the U.S. for free.
Why is this cheap?
- It’s a newspaper.
- The company is closely held.
- Former shareholders may be ridding themselves of shares they got “for free” after the split.
- The stock doesn't screen well. The income statement is a red mess.
- At some point, the pension funds won't require further funding causing a step change in reported income.
- The company may be taken private.
- The company may be acquired.
- Tribune sells or IPOs its stake in Classified Ventures LLC.
- The company simply refuses to die.
- Some of the Real Estate is sold.
Presentation with value of Real Estate
This is not a recommendation to buy or sell anything. At the time of writing, I owned stock of Washington Post Company (WPO). I had no position in any of the other stocks mentioned.