An Analysis Of Journal Communications JRN
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An Analysis of Journal Communications (JRN)
Overview
Journal Communications (JRN) encompasses seven distinct businesses: The Milwaukee Sentinel, Community Newspapers, Television Stations, Radio Stations, Telecommunications, Printing Services, and Direct Marketing. For investment evaluation, it's crucial to analyze these individually rather than as a uniform entity. The combined market value of these businesses, if separated, would likely surpass JRN's current enterprise value. This implies that the individual components are worth more than the company as a whole.Financial Snapshot
JRN has an enterprise value of just under $1 billion, with pre-tax owner earnings estimated at about $125 million, resulting in a trading multiple of eight times these earnings?"a potentially undervalued situation.With a high effective tax rate of 40%, Journal’s media properties could potentially generate more after-tax income under different ownership. This significant tax burden reduces owner earnings by $50 million.
Earnings Yield and Investment Consideration
JRN's after-tax owner earnings stand at $75 million, with an earnings yield of 7.5%, compared to a pre-tax yield of 12.5%. When compared to the 30-year Treasury bond yield of 4.63%, JRN appears to offer a significant margin of safety.Given the potential for cash flows to rise with inflation, stocks offer better inflation protection than bonds. When evaluating long-term investments, using an 8% discount rate is advisable. This reduces JRN's margin of safety from 7.87% to 4.5%?"still potentially sufficient.
Assessing Risk
A primary focus when selecting investments is the risk of a catastrophic loss, defined as any permanent principal loss. Despite the risk of misvaluation, JRN's valuation appears more secure than higher-risk stocks due to its modest earnings multiple and substantial asset backing.Business Segment Analysis
Publishing
The Milwaukee Journal Sentinel is Milwaukee’s primary daily and Sunday newspaper, with a Sunday penetration rate of 72% among the top 50 U.S. markets. The revenue here is roughly $230 million, predominantly from advertising.
Community Newspapers and Publishing Group contribute significant advertising revenue but are harder to value independently due to disclosure limitations.
Broadcasting
JRN owns 38 radio stations and seven television stations, generating approximately $170 million in combined revenue. These broadcasting assets are significant contributors to JRN's value.
Telecommunications
With a 3,800-mile network, Norlight Telecommunications generates $150 million in revenue. Although challenging to value accurately, it holds considerable worth.
Miscellaneous Operations
Printing services and direct marketing, combined with substantial real estate holdings, add further value, although exact valuations are complex due to their intertwining with core business operations.
Valuation and Potential
Estimates position JRN's total worth between $1.25 billion and $2 billion, contradicting the current undervaluation reflected in its enterprise value of approximately $1 billion. Separating and spinning off various JRN segments could unlock significant shareholder value, but such dramatic restructuring seems unlikely due to current voting dynamics.
Conclusion
While objectively undervalued, JRN's upside may be limited by its current structure and governance. Investors might face time as a cost in realizing potential value. Despite its current valuation appeal, there could be better long-term investments elsewhere.
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