Journal Communications (JRN)

Skate to where the puck is going, not to where it is. Wayne Gretzky A stock is worth its future cash flows. Warren Buffett Technology like time is a great devourer. Warren Buffett once extolled the newspaper industry in his letter to shareholders. The economics of the dominant newspaper He observed are excellent, among the very best in the business world. This was an excellent case of putting his money where his mouth was. He had invested successfully in many newspaper companies like Affiliated Publications, Gannett, Omaha Sun, etc. and made tons of money. But gradually the industry dilapidated. He observed in another recent letter Now 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. This industry has faced down surging newsprint prices, plunging ad sales, and low circulation. Many papers have closed their shops. Several are depressed with debt. And many have gone bankrupt. According to the media entrepreneur Alan Mutter :Independent, publicly traded American newspapers have lost 42% of their market value in the past three years. Few corporations have been punished on Wall Street the way those who dare to invest in the newspaper business have. Valuing Journal would be best if we do a sum of the parts analysis of its segments. There are 2 parts that are significant to an owner whether he owns the company fully or its fractions (shares).

1. Publishing consists of The Milwaukee Journal Sentinel and other community newspapers. It contributes around 50% of sales. 2. Broadcasting consists of 33 radio stations and 13 TV stations. It contributes the other 50% of sales. Lets value them The publishing segments crown jewel is The Milwaukee Journal Sentinel. It serves as the only major daily and Sunday newspaper for the Milwaukee metropolitan area. According to a 2010 readership survey conducted by Scarborough Research, the Sunday Milwaukee Journal Sentinel ranks number one in readership among the 50 highest populated markets in the United States and the daily newspaper ranks number two. Journals 10-K states: Over the course of a week, readership of our daily newspaper, online and niche products ranks second with a 61% penetration rate. In addition to traditional print media, they operate a number of websites that provide editorial and advertising content like JSOnline.com, MilwaukeeMarketplace.com, Milwaukeemoms.com, and MyCommunityNOW. Also, a subscription-based website, PackerInsider.com, dedicated to coverage of the Green Bay Packers and JobNoggin.com, an employment site. Now I would like to be vaguely right instead of precisely wrong. So to value this paper and its other community papers we have to use the art of intelligent guessing. Circulation revenue has accounted for 33% of daily newspapers total revenue in 2010 and advertising accounted for 56% of total revenue. Journals 10-K candidly says: Our daily newspaper experienced decreases in revenue in most advertising categories in 2010 compared to 2009 due to the secular influences affecting the newspaper industry and the continued economic uncertainty. As I searched through blogs, I came across an interesting blog by a media executive on valuing newspapers companies. He writes that it is possible to estimate the value of your local newspaper according to its circulation, its revenues and its EBITDA. He further says that if you average the outcomes of

all three of the above methods, you can arrive at a fair approximation of what your paper is worth. Lets run this on our paper.

Circulation Here is the table from the 10-K: Six-Months Ended September 30 2010 2009 Daily 183,636 190,841 Sunday 331,171 334,240 12-Months Ended March 31 2010 2009 188,644 207,717 331,184 368,686

2008 212,157 375,432

2008 219,214 387,756

The declining trend is not good. But we know why it is happening. The industry is in decline. The analyst suggests we value the paper at $294 per daily subscriber and $227 per Sunday subscriber. Multiply the number of subscriptions by these metrics to come to a rough valuation. $294 x 188,644 + $227 x 331,184 We get $55 million + $75 million = $130 million

Revenue The analyst says if you know your papers revenue, multiply it by 0.33 to calculate its approximate value. 0.33 x $182 million. (Note: I have clubbed the revenue of other newspapers that it publishes in this to get an overall idea) We get $60 million

EBITDA If you know your papers EBITDA, multiply it by 3 to calculate its approximate value.

I am twisting this a little bit by using EBIT as EBITDA figures are not supplied in annual report. And I will be using t to 7 times EBIT given its monopoly nature in the Wisconsin area. EBIT is $18 million. So that comes to: $90 million to $126 million. If we average these 3 approaches, we get $100 million. Yes I think the Milwaukee Journal Sentinel is worth at least $100 million even in the declining environment. Next comes Radio and TV stations. Revenue from our radio stations in 2010 was $69.3 million, an increase of $3.2 million from previous year. Operating earnings were $14.5 million.

Radio Stations Valuation Media veteran George Reed says this on his blog: Our crystal ball worked. In fact, much of 2008s station trading occurred in a 7x to 9x range, though deteriorated toward the lower end of the range as the year wore on. However we were wrong on our second point: we predicted a turnaround by mid-year. What we (and apparently everyone else) missed was the impact on the credit markets of the sub-prime debt debacle. OK, so what happens this year? The following is my opinion, and not necessarily Media Services Groups (it is my blog, isnt it?). I think that we are in a 5x to 8x environment, likely for the rest of the year, and perhaps longer. Until the credit markets thaw, I do not see marked improvement. Trading will be sluggish at best. At lot of balance sheets have to be re-jiggered to show more equity and much less debt. Radio stations therefore are valued in the range of 5 to 8 times $14.5 million.

Or $73 million to $116 million. TV stations are valued at 7 times cash flows. I am using EBIT which has significant depreciation and amortization. So I am using a higher multiple of 10 times EBIT. That comes out to 10 x $29 million or $290 million. Journals radio stations are worth $100 million. And Journals TV stations are worth $290 million.

Journals Parts Newspapers: $100 million Radio Stations: $100 million TV stations: $290 million Total: $490 million

It also holds substantial properties in Wisconsin tied up with operations. The enterprise value is around $250 million. The business can be liquidated and sold. But this not easy and cannot be counted on. Liquidating is not hassle free and can take many years thus giving a poor overall return. The gap between price and value is not sufficient if we consider taxes and other costs. Also, employees control JRN with major voting rights. So shares of Journal Communications are a quick pass for me.