10-Minute Investment Autopsy No. 12: Journal Register
Valuation is no defense against existential secular threats
If you haven’t read the guide to the 10-Minute Investment Autopsy series, you can find it here.
The Original Thesis
Who: John Rogers, Jr.
When: November 2005
What: Journal Register (ticker: JRC)
The Thesis:
The newspaper business is stable and has not lost its economic moat
The negative sentiment on the industry makes it appealing to value investors
Journal Register focuses on smaller towns with important local content - something that a national website won’t be able to replicate
Since newspapers are the primary vehicles for local information, they will remain very attractive to local advertisers
John believes that management will be able to figure out how to transition the business model to the web
A lot of the decline in newspaper circulation stems from a change in how it is being calculated, and he thinks the numbers won’t look bad going forward
John sees meaningful cost cutting opportunities
Private Equity is showing interest in the space
Valuations at 11x EV/EBITDA are well below historical levels
Estimates private market value of $23.44, 50% above the stock price
Biggest risks are if newspapers can’t make the publications interesting to the next generation of readers or if they can’t make the transition online in an economically viable way
These are the highlights of Journal Register’s then-recent financials up to the point when John was presenting his thesis:
This is the stock chart up to the time when John presented his thesis:
Pause here. Think through the thesis and the facts and decide what you agree with, what you disagree with and whether you would invest based on the information available.
What Happened (Just the Facts)
Journal Register’s financials following John’s presentation were as follows:
Company’s sales declined by almost 20% between 2005 and 2007
Profits got cut in half due to the operating leverage magnifying the impact of revenue declines
Net Debt/EBITDA jumped from an already-high 5.6x in 2005 to 7.6x in 2007
Journal Register shareholders lost all of their money
There is a lot more to the case:
The Autopsy - the reasons for what happened
The Lessons that you can apply to your own investing
Discussion Questions for you to think about and discuss with other thoughtful investors in the weekly case thread