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A.H. Belo (AHC), A Spin-Off Bargain

July 21, 2008 | About:
Dah Hui Lau

Dah Hui Lau

3 followers

Investment Thesis:

A.H. Belo was spun off from Belo Corp. on February 8, 2008. A.H. Belo owns three major daily newspapers: The Dallas Morning News, The Providence Journal and The Press-Enterprise.

These are the arguments why A.H. Belo would be a good investment:

1. Low valuation: A.H. Belo trades at EV / Sales of 0.1 and EBITDA / EV of 66.3 percent. It has the lowest valuation in comparison to its competitors. (Note 1, page 4 - 6)

  Price / share EV / Sales EBITDA / EV
Gannett $16.87 1.1 24.4%
New York Times $12.66 1.1 12.7%
Media General $12.62 2.1 -3.8%
McClatchy $4.61 1.4 18.2%
Washington Post $597.00 1.2 12.6%
Daily Journal $40.52 1.2 20.7%
Lee Enterprises $3.49 1.5 15.4%
Average   1.4 14.3%

 

2. Sale of Newsday: Newsday is sold to Cablevision for $650 million. Newsday sales for 2006 was $541 million, which valued Newsday at price / sales of 1.2.

3. Private market value of Tribune: Tribune was taken private in December 2007 at EV / Sales of 2.4 and EBITDA / EV of 10.1 percent. (Note 2, page 7)

4. Free newspapers: At the current price of $5.83 per share, EV of A.H. Belo is $102.5 million. A.H. Belo owns a number of properties, which are valued at $151.2 million. After 25 percent haircut, the properties would be worth $113 million. This means the three dominant newspapers with $724 million of sales and $68 million of EBITDA are free. (Note 3, page 8)

5. Significant margin of safety: A.H. Belo is trading at 60.0 percent discount to expected value of $298.7 million or $14.57 per share. Expected value is calculated using the following assumptions: (a) 75 percent probability that A.H. Belo trades at EV / Sales of 0.55 and (b) 25 percent probability that it goes bankrupt. This is conservative as EV / Sales of 0.55 is half of the lowest EV / Sales ratio of its competitors, which are Gannett and New York Times. Likewise, assigning 25 percent chance of bankruptcy is conservative, as A.H. Belo has no debt and owns a lot of properties.

6. Presence of competitive advantages on local news and information: The Dallas Morning News is located in the center of North Texas and is the 10 th largest daily and 13 th largest Sunday newspaper in the country. It is the only main daily in Dallas. Its closest and longest-lived rival, The Dallas Times Herald, went out of business in the 1992. The Providence Journal is the largest content provider of local news and information in the Southeastern New England region while The Press-Enterprise is the largest daily newspaper in Inland Southern California. (Note 4, page 9)

7. Experienced and shareholders-aligned management: Robert Decherd is a fourth-generation of founding family member and acts as the Chairman, President and Chief Executive Officer of the new A. H. Belo. Decherd is one of the longest-tenured CEOs in the media industry in the United States, having worked for Belo since his graduation from Harvard College in 1973 and serving as CEO since January 1, 1987. Management has a significant equity stake in the company; 15.3 percent of total outstanding shares. (Note 5, page 10)

8. Supply/demand imbalance: Index funds own approximately 16% of Belo Corp. As A.H. Belo is not one of the components of the S&P 900, S&P 1000 and S&P MidCap 400 indexes, its shares would be sold regardless of its fundamentals.

9. Lack of analyst coverage: Being a newly spun off company, A.H. Belo does not have analyst coverage. This lack of coverage would ensure low demand for its shares in the short term.

10. Catalysts: When analyst starts covering A.H. Belo and the selling pressure from index funds is gone, A.H. Belo should trade higher.

Price (On 18 th July)

$5.83

52-week range

$5.26 - $16.35

No of Shares (millions)

20.5

Surplus Cash per share

$0.83

EV per share

$5.00

Debts per share

$0

EBITDA per share

$3.32

EBITA per share

$1.07

Valuations:

Market Cap (millions)

$119.5

EV / Sales

0.1

EV (millions)

$102.5

EBITDA / EV (%)

66.3%

NTA (millions)

$323.0

Price / NTA

0.4

Balance Sheet: Financial Strength

Total Debts (millions)

$0

Total Debts / EBITA

N/A

Interest Expense (millions)

$0

EBITA / Interest Expense

N/A

Expected Value:

Relative Value (EV / Sales of 0.55, which is half of the lowest EV / Sales of its competitors, which are Gannett and New York Times) (Probability: 75%)

$19.42

Worst Case Value (Bankruptcy) (Probability: 25%)

$0

Expected Value (Probability: 100%)

$14.57

Discount to Expected Value

60.0%

IRR (Exit Time: 2 years)

58.1%

  • EV = Enterprise value; EBITDA = Earnings before interest, taxes, depreciation and amortization; NTA = Net tangible asset; IRR = Internal rate of return.

Note 1: Relative Value Against Peers

Companies

A.H. Belo

Gannett

New York Times

Price per share (On 18th July)

$5.83

$16.87

$12.66

LTM, Ending

31-Mar-08

30-Mar-08

30-Mar-08

No of shares (millions)

20.5

229.7

144.0

Market Capitalization (millions)

$120

$3,875

$1,823

Surplus Cash (in excess of 1% of revenue) (millions)

$17

$90

$17

Total Debts (millions)

$0

$4,212

$1,545

EV (millions)

$103

$7,997

$3,351

Sales (millions)

$724

$7,286

$3,157

EV / Sales

0.1

1.1

1.1

EBITDA (millions)

$68

$1,948

$424

EBITDA / EV (%)

66.3%

24.4%

12.7%

EBITDA Margin (%)

9.4%

26.7%

13.4%

EBITA (millions)

$22

$1,704

$257

EBITA / EV (%)

21.2%

21.3%

7.7%

NTA (millions)

$323

Neg

$128

Price / NTA

0.4

N/A

14.2

  • EV = Enterprise value; EBITDA = Earnings before interest, taxes, depreciation and amortization; EBITA = Earnings before interest, taxes and amortization; NTA = Net tangible asset.

Companies

Daily Journal

Lee Enterprises

Price per share (On 18th July)

$40.52

$3.49

LTM, Ending

31-Mar-08

30-Mar-08

No of shares (millions)

1.5

44.8

Market Capitalization (millions)

$59

$156

Surplus Cash (in excess of 1% of revenue) (millions)

$16

$110

Total Debts (millions)

$0

$1,521

EV (millions)

$43

$1,567

Sales (millions)

$37

$1,078

EV / Sales

1.2

1.5

EBITDA (millions)

$9

$242

EBITDA / EV (%)

20.7%

15.4%

EBITDA Margin (%)

23.9%

22.4%

EBITA (millions)

$8

$262

EBITA / EV (%)

18.4%

16.7%

NTA (millions)

$25

Neg

Price / NTA

2.3

N/A

  • EV = Enterprise value; EBITDA = Earnings before interest, taxes, depreciation and amortization; EBITA = Earnings before interest, taxes and amortization; NTA = Net tangible asset.

Note 2: Private Market Value:

Tribune Company completed its going-private transaction on 20 th December 2007. It first announced that it was taken private in April 2007 at $34.00 per share. This valued Tribune at 10 times EBITDA.

Companies

Tribune

Price per share

$34.00

LTM, Ending

31-Dec-06

No of shares (millions)

240.2

Market Capitalization (millions)

$8,167

Surplus Cash (in excess of 1% of revenue) (millions)

$130

Total Debts (millions)

$4,956

EV (millions)

$12,993

Sales (millions)

$5,518

EV / Sales

2.4

EBITDA (millions)

$1,312

EBITDA / EV (%)

10.1%

EBITDA Margin (%)

23.8%

Shareholders' equity (millions)

$4,320

Price / Book

1.9

  • EV = Enterprise value; EBITDA = Earnings before interest, taxes, depreciation and amortization.

Note 3: Properties:

Property values are obtained from appraised market values for tax purposes. There are a number of properties in Dallas, which are co-owned by A.H. Belo and Belo Corp. that are not listed below as there are uncertainties regarding the exact ownership of the properties. Therefore, the property values would certainly be understated.

The property value of the new state-of-the-art building of The Press-Enterprise at 3512 Fourteenth Street, Riverside, is estimated using cost price, as the appraised market value for property tax could not be found. This would be a reasonable valuation since the building was officially opened in September 2007.

Properties

Certified Values 2007 (millions)

Properties

Certified Values 2007 (millions)

5380  Red Bird Center Drive , Dallas

$0.07

204 Kinsley Avenue, Providence

$7.10

508 Young Street, Dallas

$9.10

288 Kinsley Avenue, Providence

$0.81

4616  Langdon Drive , Dallas

$15.18

206 Kinsley Avenue, Providence

$0.82

613  West State Street , Dallas

$0.08

286 Kinsley Avenue, Providence

$0.93

900  Jackson Street, Suite 400 , Dallas

$1.30

3900 Plano Parkway West, Plano

$47.29

400 South Record Street, Dallas (Belo Building) (50% owned)

$7.00

2010 Redbud Blvd, McKinney

$0.01

75 Fountain Street, Providence

$18.09

1000 Avenue H E, Arlington

$0.74

93 Washington Street, Providence

$1.51

1256 Main St # 278, Southlake

$0.11

153 Harris Avenue, Providence

$0.32

2875 Market Loop, Southlake

$0.04

119 Harris Avenue, Providence

$0.71

3512 Fourteenth Street, Riverside

$40.00

 

 

 

Total Values

$151.21

Note 4: Competitive Advantages:

A.H. Belo’s competitive advantages lie in its scale and brand recognition of its local news and information businesses. No local cable channel, television station, radio station, magazine or online site can match its local reporting and local sales resources.

The Dallas Morning News is located in the center of North Texas and is the 10 th largest daily and 13 th largest Sunday newspaper in the country, with daily circulation of 372,000 and Sunday circulation of 523,000. It is the only main daily in Dallas. Its closest and longest-lived rival, The Dallas Times Herald, went out of business in the 1992.

The newsgathering staff at The Dallas Morning News is ten times larger than the average size of a local Dallas / Fort Worth television station. The sales staff of The Dallas Morning News is nine times larger than its closest competitor. This gives The Dallas Morning News the ability to create more products and cover local news with more breadth and depth than any competing local media company.

DallasNews.com is the number 1 website for local news and information. It almost doubles the audience reach of its nearest competitor, Wfaa.com; 12.1 percent versus 6.7 percent of audience reach.

The Dallas Morning News has leveraged its scale to produce targeted niche products, such as Al Dia, Quick, F!D luxe and NeighborsGo. Al Dia, a daily Spanish-language newspaper, and its related website, AlDiaTX.com, serve North Texas Hispanics with weekly readership totalling 178,000. Quick, a fast-read tabloid-format publication, and its related website, QuickDFW.com, target 18- to 34-year-old adults and have weekly readership totalling 234,000. F!D luxe is a monthly fashion publication distributed in high-income zip codes and has monthly distribution of 150,000. NeighborsGo is a collection of geographically targeted niche products about neighborhood news including school and civic activities. NeighborsGo delivers 17 consumer-generated media publications covering specific communities with distribution of between 15,000 and 25,000 copies per community, with a total weekly print distribution of 234,000.

The Dallas Morning News is also using its scale and infrastructure to develop new revenue streams in contract printing and distribution services. It is currently supplying these services to USA Today, the Dallas Observer, the Financial Times, Investor’s Business Daily and The New York Times.

The Providence Journal is the largest content provider of local news and information in the Southeastern New England region. Its website, projo.com, is also the number 1 local website. The Providence Journal has profitable niche products, such as Rhode Island Monthly, which has monthly distribution of over 40,000.

The Press-Enterprise is the largest daily newspaper in Inland Southern California. Its market includes Riverside and San Bernardino counties. Over 80 percent of subscribers receive delivery of the newspaper between 4:30 a.m. and 5 a.m., which is a critical competitive advantage in a market where over 70 percent of residents commute more than an hour every morning to work in neighboring Los Angeles, Orange or San Diego counties. Its website, PE.com, is the most widely-used local website. It also has the largest Spanish-language weekly newspaper in its market, La Prensa.

Note 5: Management:

Robert Decherd is a fourth-generation of founding family member and acts as the Chairman, President and Chief Executive Officer of the new A. H. Belo and non-executive Chairman of Belo Corp. Decherd is one of the longest-tenured CEOs in the media industry in the United States, having worked for Belo since his graduation from Harvard College in 1973 and serving as CEO since January 1, 1987.

Under Decherd's leadership, Belo Corp. grew its revenue from $397 million to $1.6 billion, while net income grew from $20 million to more than $130 million. Decherd has orchestrated a series of acquisitions that substantially changed the company's asset base since 1981. Beginning with the $606 million acquisition of the Corinthian Broadcast Group from The Dun & Bradstreet Corporation in 1984, which was the largest television acquisition in history at the time, the company purchased WWL-TV in New Orleans, Louisiana (1991); The Providence Journal Company (1997); and, the Riverside Press-Enterprise (1998). Belo Corp. transformed into one of the largest media companies with three major newspapers and 20 television stations, including six of the top 14 markets, have won 13 Pulitzer Prizes, 21 Alfred I. duPont-Columbia Awards, 20 George Foster Peabody Awards and 31 national Edward R. Murrow Awards, the most prestigious journalistic awards in the newspaper publishing and television businesses.

Management is experienced and competent in managing profound changes in the newspaper industry. In April 2006, The Dallas Morning News instituted a planned circulation reduction, narrowing its distribution perimeter to approximately 200 miles outside the Dallas / Fort Worth designated market area. Further refinements to the distribution perimeter were instituted early in 2007. These actions would result in annual savings of nearly $10 million.

Management is also dedicated to build strong online revenue. A.H. Belo’s Internet revenue has grown from $13.1 million in 2002 to $52.6 million in 2007, a compound annual growth rate of 32 percent. Although online revenue only accounted for 8.8 percent of total newspaper advertising revenue, it will continue to be an increasingly larger percentage of company’s total revenue.

An online partnership with Yahoo! such as Yahoo! HotJobs would result in a greater distribution network for employers and an improved user experience for job seekers. In addition, Yahoo!’s graphical ad serving technology will create a common platform that allows the building of a local media national online network.

Management is focused to return cash to shareholders through an attractive dividend yield. This should ensure that cash will not be squandered unnecessarily on big acquisitions.

As importantly, management has a significant equity stake in the company; 15.3 percent of total outstanding shares.

Additional Information:

Reasons for Spin-off:

The newspaper and television businesses, once thought to be on a path toward convergence, are now moving in different directions as regulatory obstacles to cross-ownership remain and new technologies have altered the media landscape. By separating the newspaper and television businesses, A.H. Belo and Belo Corp. can respond to different industry dynamics and better focus on strategic initiatives and priorities.

Separating the entities allows the investment community to measure A.H. Belo’s performance and Belo’s performance relative to their respective peers. The creation of more focused “pure-play” companies enables the investment community to analyze each company easily.

A.H. Belo was capitalized with no debt to allow it to focus on investing in technologies that will likely become the core of its future business without concerns about servicing the high debt loads.

The spin-off was structured to enable A.H. Belo to provide its management and employees with customized incentive compensation in order to align its interests with the interests of its shareholders.

Risks: Understanding Potential Downsides

The most significant risk that is faced by A.H. Belo and the newspaper industry as a whole is clearly summarized by Warren Buffett of Berkshire Hathaway.

To quote Buffett (annual report 2006), “For most of the 20 th Century, newspapers were the primary source of information for the American public. Whether the subject was sports, finance, or politics, newspapers reigned supreme. Just as important, their ads were the easiest way to find job opportunities or to learn the price of groceries at your town’s supermarkets.”

“The great majority of families therefore felt the need for a paper every day, but understandably most didn’t wish to pay for two. Advertisers preferred the paper with the most circulation, and readers tended to want the paper with the most ads and news pages. This circularity led to a law of the newspaper jungle: Survival of the Fattest.”

“Now, however, almost all newspaper owners realize that they are constantly losing ground in the battle for eyeballs. Simply put, if cable and satellite broadcasting, as well as the internet, had come along first, newspapers as we know them probably would never have existed.”

“There’s no rule that says a newspaper’s revenues can’t fall below its expenses and that losses can’t mushroom. Fixed costs are high in the newspaper business, and that’s bad news when unit volume heads south.”

A.H. Belo’s directors and executive officers hold 58.2 percent of the voting power and therefore, have significant influence over all matters requiring shareholder approval, including election of directors and significant corporate transactions. This may limit shareholders influence on corporate matters and A.H. Belo could potentially take actions that may not be beneficially to shareholders.

Other risk factors include a possible recession, and a decline in real estate values and employment, leading to a decrease of advertising revenue.

_______________
Source: Dah Hui Lau's new blog: http://lollapaloozainvesting.blogspot.com

 

About the author:

Dah Hui Lau
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 4.0/5 (14 votes)

Comments

silverpill23
Silverpill23 - 5 years ago
nice analysis
highroi
Highroi - 5 years ago
Very good write up and in-depth analysis.

My major concerns are how do you extract the real estate value when management and the board of director's control the vote?

A conflict of interest to keep their jobs and burn through cash exists as the insiders only own 76,970 shares yet control the vote.

Per the 10Q page 5 online sales are only 7.5% of revenues and decreased this quarter. With circulation decreasing across all major publications their internet revenue needs to experience astronomical growth to offset the loss in print revenue.

Even without the notes payable interest expense in this quarter the net loss almost doubled if you take into consideration the tax benefit from previous losses.

In the last three years the company has experienced losses in the 1st quarter and losses in the third quarter of 2007 and 2006. As reveune decreases the company's economies of scale are decreasing and the operating losses are going to accelerate. When I look over the income statements over the last two years and try to make projections on current revenue it looks as though the company is going to experience an operating losss this year with no signs of a turnaround in the foreseeable future. Their flagship paper has a linear decrease in circulation of 18% and 19% for daily and Sunday over the three years from 2005 to 2007 per the 10K on page 2.

Your quote by Warren Buffet says it very well...

“There’s no rule that says a newspaper’s revenues can’t fall below its expenses and that losses can’t mushroom. Fixed costs are high in the newspaper business, and that’s bad news when unit volume heads south.”

I think you have shown unbelievable insight on this anylisis much better than I could ever do and I thin this would be in private equity hand's if it were not for the vote control.


Sivaram
Sivaram - 5 years ago
Very good analysis. Good job capturing the various elements at play. I've been looking at newspapers lately as well, and, well, let's hope neither of us fall into a value trap. Couple of notes...

I think it's worth including for the sake of completeness but I don't think one should put much faith in the Tribune takeover value. It was taken out when credit was cheaper (you can't do that deal right now--let alone for a newspaper.) But more importantly, Sam Zell's deal is structured to take advantage of tax benefits.

You probably already know this but I wouldn't put much weight to comparisons against The New York Times or Washington Post. The first because it has a lot of brand equity and is one of the few that may be able to leverage that to the online world on a large scale. The latter because it generates almost half(?) its revenue from the education industry. I think it's worth leaving them as a comparison but one should downplay the comparison.

One area I see some weakness has to do with potentially declining revenue. Given taht the whole industry is struggling, what happens if sales decline a bit? How will it perform with sales down, say, 20% over a 5 to 10 year period?
dgsyte
Dgsyte - 5 years ago
Thanks for your comments.

One of my friends put it this way:

Poor operating business + no hard catalyst + no potential for activism = value trap

That is probably why the stock is so cheap.

I don't know how to project its earnings out 5 to 10 years.

My overall thesis is that I'm paying less than the property values and getting the rest of the newspapers for free. As long as it doesn't start haemorrhaging huge amount of money, it is hard to go bankrupt. This is a cigar-butt investment, rather than Buffett-type investment.

David

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