Poboyz did an excellent job laying out both sides of the argument on LEE. I personally see four keys to this stock's performance in 2011. They are:
2) Print Circulation
3) Digital Growth/Monetization
4) Debt Repayment/Restructuring
Revenue is the most important factor IMO. LEE has historically performed better than other newspaper companies and likely will continue to do so. Revenue should turn positive later in 2011 as digital revenue growth overtakes print declines and the economy continues to improve (more hiring/greater auto sales/bottoming in home sales). This current quarter is historically LEE's weakest. I see revenue being flat this quarter Y/Y with earnings of about $0.06/share (ex items) and between $20-25M in debt repayments. They earned $0.04/share (ex items) last year in this quarter. This quarter's earnings should be out April 19th. Earnings for the balance of the year should be positive and improve over prior year due to improving revenues, lower interest rates and good cost control.
Circulation rates for print has been on the decline for over 30 years and this secular trend will continue. Circulation is tied to rates charged advertisers that generates revenues. But I think the declines will be less than many think. If you look at the latest 10Q, LEE reported circulation in line with ABC's reported stats from 9/30/10. I expect circulation for LEE to be down low single digits on the next report. ABC will issue the next circulation numbers in late April.
Digital growth will be a key to LEE's future and this area is growing very rapidly. It is to the point where new digital revenue growth is going to offset the print revenue declines allowing revenues to start to grow again. I also believe newspapers will move to pay models for heavy users, including LEE. Others are currently moving in that direction and as 2011 moves along, we will get to see how NWSA, AHC, NYT and others are doing in this area and whether LEE follows. Newspapers will be delivered on multiple platforms: print, internet, mobile, etc., but ultimately all will involve some type of charge to users as newspaper companies generate about 2/3 of the news content found on the net. And demographics of users (mainly baby boomers) will still drive print sales for many years to come.
Debt is certainly the gorilla weighing on this stock. But LEE has strong cash flow which has been improving and they have been able to handle debt obligations and should continue to do so. The big quesiton is what will the new debt structure look like including rates and when will the restructuring occur. They have a shelf registration in place for up to $750M of financing and could go to the debt market well ahead of April, 2012, as GCI and MNI did last year. Some have suggested LEE will use this to issue equity, but that is bunk, as the controlling family will not issue new shares and give up control of LEE. The debt will be restructured, the questions are when and at what cost/interst rate.
I am long the stock and have continued to buy at the current pricing. I like the other investors that are buyers along with me: Goldman Sachs, Blackrock, Ariel, etc. Many others are negative on the stock as the stock has over 17% of the shares short with 7.8M short. But there are plenty of buyers here at $3 as all the new shorts keep getting bought up and the stock is still slowing pushing higher. Any of the above issues going against the shorts can move LEE very quickly higher if shorts start to cover. But I like the fact they are selling me shares at $3 when the company is generating over $2/share in free cash flow, all of which is going to further pay down debt and building equity. LEE is mispriced IMO and seriously undervalued, a buying opportunity.
On a price EV/EBITDA basis LEE is more expensive than MNI,NYT and GCI.. the other major newspaper plays. While the analysis on this thread is way better than most I read, the conclusion that LEE is priced too low is incorrect based upon what I regard as the best value measurement.
If I had to guess, I'd say you're somewhat new to the investing game, to me one of the most enriching (in many ways), exciting, and fulfilling games out there. Remember these two rules.
1. Buy wholesome companies that are well-run, not "great ideas" or "the future".
2. The name of the game is finding stocks that are mis-priced.
The book "You can be a stockmarket genius" has a horrible, horrible name, but I read it this year, and the authors ideas are the same ones that I learned the hard way over the years. It's brilliant, and really the way you should think of investing.
Now on to LEE. You'll have to learn to do your own research, but that comes in time. Regardless, here's a readers digest version.
1. Revenue has been shrinking for 4 years now.
2. 1 billion in debt.
3. Future of newspapers and media looks ugly right now.
4. Circulation falling = less leverage with advertisers.
5. Print news will likely die someday. Will it die slow enough to allow a switch to digital to take place?
6. Volatile price- you'll constantly be pulling your hair out over "missed opportunities" to buy in or sell out. (Granted, with time, you'll learn to ignore the huge swings.
7. Need to refinance (roll over debt) within 14 months. Interest on debt will increase.
1. Very profitable still.
2. Revenue decline has been leveling off for months and declined only 1% last quarter.
3. Lee is way ahead of the curve on digital advertising, mobile advertising, "Groupon"-like sales.
4. Digital revenue only 10% of income but growing at 40% yearly rate and looks to completely cover losses in print revenue this year. This means possible revenue growth this year, which would explode the price.
5. IMO Lee has always been honest and accurate in their reports about their revenue prospects.
6. Other sources of local news in Lees areas are non-existent, or floundering (like Patch.com) = monopoly.
7. Only paying 5% on debt.
8. Paying down 100M in debt per year with no problems at all so far.
What to watch, if, after you buy-
1. The upcoming print circulation numbers in April. If it drops 5% or more, the stock will get crushed, if it drops 1-5%, it will drop a bit, if it increases, it will run.
2. The digital numbers. May go to 16 or 17M this quarter. If so, the stock will run.
3. Revenues from it's Groupon-like project called "Today's Deal". 1 million in 9 months and growing rapidly.
Fundamental, abstract questions
1. Will people still want local news?
2. Can larger companies like Google, Groupon, Yahoo supplant Lee as a local news/advertising source?
3. Does information really want to be free? Or does it want to be expensive? Or does it want both?
4. Are newspapers going to die? If so, where will people get news from? Who will report on what happens in Edina, Minnesota? Bloggers? Non-profit news?
6. Will other news site's paywalls (The Times of London, NYTimes, Dallas, WSJ, Financial Times, Telegraph) succeed?
7. Just cause something is free, does that mean people will pay for a version of it that is not free, but of possibly higher quality, more trustworthy and more convenient? Like bottled water?
Personally, I think LEE is a great stock to start on...
Thanks for the thorough explanation....very impressed. I am young but have been investing in market for 5 years. I'm still pretty experienced though I've been lucky on my intuition before (plus looking at key stats of course. I think local newspapers are not going to die out b/c its not always convenient to look at the news on a computer and not everybody can afford computers/kindles/iPad, etc.