February 22, 2012 PSW Staff |
radio and television broadcasting. The company sells advertising on 33 radio stations, 13 television stations, the only daily newspaper in Milwaukee, Wisconsin (Milwaukee Journal Sentinel) and other community newspapers and shoppers. Journal Communications operates primarily in southern Wisconsin, but also has properties in 11 other states. The publishing industry has been in free fall mode for almost two decades now, and with advertising dollars dwindling due to economic weakness, companies like Journal Communications have seen shrinking revenues thanks to this twofold dilemma. The internet has been the culprit as readers and in some cases, watchers are getting their news content when they want it, and how they want it, for free. This problem for newspapers has been compounded more recently as the hand-held devices have come into play. Several pieces of evidence, which we will get to shortly, suggest that a turnaround may be in the making. Smaller companies focused on local markets would likely experience more dramatic valuation adjustments, and could end up being leading indicators for some of the bigger media names. Journal Communications currently has a market cap of $267 million and an enterprise value, which includes the debt, of $323 million. This and most of the publishing focused media companies have seen plummeting stock prices to go along with the revenue declines, and most currently sport some pretty low valuations. These valuations need to be looked at closely, however. P/E is not exactly working because with revenues and earnings shrinking quarter over quarter and year over year, trailing 12 month earnings are higher and in some cases exponentially more than what should be expected for the coming 12 months. With only a couple of analysts and little guidance from the company itself, forward P/E is not the best way to go with this stock either. We do have some solid evidence that revenues are bottoming, or at least further declines look to be a fraction of what they have been. Looking at revenue, we see that many of these companies have enterprise value to revenue ratios that are at or below one. This is a testament to the decrease in both debt and value these companies have seen while still generating substantial revenues. JRN's EV/Revenue is 0.89, meaning the company is bringing in more than its worth in a year. The stock is trading just above book value as well. Digital advertising revenue, which is still only a tiny fraction of this company's sales, has been growing all along, and with the economy potentially turning around, all advertising revenues may be headed in the same direction. McClatchy (MNI) said late last year that it saw improving advertising revenue trends in September, October and November. Also, several media companies have reported improved advertising revenues in the fourth quarter. Journal Communications gets a large chunk of its business from political advertising. This tends to come around during even numbered years, and this year, we happen to already have seen record political ad spending. None of this will, of course, be reported until May, but it does offer some cushioning for future results should year end 2011 earnings not be so stellar. The last and perhaps most important piece of the puzzle is a revamping of the companies digital footprint. With dozens of online properties branded alongside the air and print entities, Journal Communications has brought in a new V.P. with a wealth of digital experience. In January, JSOnline.com, which serves readers of the Milwaukee Journal Sentinel began charging for content the same way the New York Times has been doing. JSOnline will also be rolling out and iPad app and updated iPhone and Android apps this Spring. The New York Times already has close to a half a million subscribers to the digital content. They have also seen an increase in print subscriptions for the first time in five years because they are offering the digital content for free to Sunday subscribers. Journal Communications is also offering free digital content to weekend readers, and this is key because a large chunk of this company's advertising revenue comes from the Sunday paper. JRN has seen a dramatic decrease in shares being sold short between the end of last year and now by some 30% to a still substantial 1.1 million. The company has 56 million shares outstanding, has a ten year history of decreasing its share count and has funds authorized for additional repurchasing. Journal Communications will release its fourth quarter and year end results tomorrow, February 23, and having a little bit more concrete evidence that things are turning around would be a great buy signal, while a mediocre quarter may allow for a better entry point in the near future. |
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