Buffett is a 4% Owner of my Newspaper Company


I consider LEE a misunderstood stock in a misunderstood market. A perfect value stock recipe.
I am not sure how LEE started to come up on my value scanners but like Greenblatt, I have a small cap bias because that is where small fish like us make money. So I like to stick with scary beaten down and left for dead stocks like LEE, NOK, RSH, etc.


Guest post by

Frank Tudor

Visit Blog

History of Lee Enterprises (LEE)

Lee was started in 1840.  The company avoids anything that would compromise its news reporting objectivity including political forces and money traps.  The company went public in 1969 and was listed on the NYSE in 1970.  LEE owns 49 dailies in regions where the papers cater to populations that are 28,000 or less.  They are small town newspapers.

Investment Overview

I consider LEE a misunderstood stock in a misunderstood market. A perfect value stock recipe.

I am not sure how LEE started to come up on my value scanners but like Greenblatt, I have a small cap bias because that is where small fish like us make money. So I like to stick with scary beaten down and left for dead stocks like LEE, NOK, RSH, etc.

I have put LEE through the meat grinder and I can tell you the results are not pretty.  They have a high debt load, they are skirting the shoals of bankruptcy, and they are in the newspaper business.

One thing this stock has going for it is the golden hand of Buffett.  Yes the master himself leaped in and with a stroke of his wand, the stock was somehow saved from certain death. Short sellers tried to break the stock, but failed.

In a market that slaps us around and takes our money there is one stock out there that is making me money.  This is LEE.

Why did Buffett Appear?

Possibly two things triggered Buffett’s intervention.

One: Insiders were buying the stock. 10K shares were purchased in December by the interactive media director Gordon Pritchett. The CEO, Mary Junck, bought 100k shares at $1.06 around May 6-8. Buffett states that this is a telling behavior, it means the management cares (and they do).

Two: Management is very competent and candid with their investors. They did not sugar coat the halting of debt deals waiting for better deals to come down the road. Here is the letter to investors (pdf). Talking the worst up at the table takes inner strength.  So there is integrity in the upper echelons of Lee Enterprises.

Buffett dove in and purchased their debt from Goldman Sachs (at a loss to Goldman Sachs at .60 cents on the dollar…They wanted .80 cents).

In any case, we have the golden hand of Buffett putting some major pressure on the stock.

Brief Technical Analysis Discussion

First I would like to briefly touch on some technical behaviors of this stock. I am a value investor at heart but I also like to mix in some basic technical analysis.

According to the chart below, there is a convergence of a 20 day and 50 day moving average with a solid floor placed at $1.13.  The stock is under accumulation and it is clear that the stock has transitioned from a dead stock to a very cheap value oriented stock under accumulation. See the 200 day moving average on the chart? The closer the 200 day gets to the 20 and 50 day the more powerful the move higher will be.

Fundamentals and Valuation Numbers

LEE is not the easiest company to value because of the high debt load which causes many ratios to go out of whack. This presents an opportunity for value investors who are willing to put in the time and effort to go through the numbers by hand.

There is no stability or consistency in any of the ratios. PE, P/FCF, ROE, ROA, CROIC, P/B are all very volatile and inconsistent. With a company like LEE, the rear view mirror isn’t the best indicator. Yes, Buffett has said that that in the investment world, the rear view mirror is better than the front, but when we are looking at a company like LEE, it is important to compare the company to itself based on present information vs the past.

One thing that is certain is that the market is still pricing LEE to be a dead company.

While the income statement is expected to show a negative EPS, the cash flow statement has shown positive cash flow and improvements in FCF. This is most likely due to the halt in acquisitions following the 2008 crash.

The one ratio that really stands out is P/FCF which is currently at 0.18x.

Net Reproduction Value of the stock is $24 per share. However, until the debt situation is corrected, the NCAV is -$21 per share.

Piotroski score is currently a 5.  Inside the Piotroski score, there are two important elements being met.

  • Asset Turnover and Shares Outstanding reduction.

Historically from 2002 to 2011, the first point in the Piostroki score, Net Income, has only been missed 3 times, clustering around 2008, 2009 and 2011 due to the recession and perception that newspapers are dying.

The Altman Z score is in the basement at -1.15. Keep in mind that the Altman Z score was found to be 72% accurate in predict bankruptcy.

Rather than try to pinpoint what LEE is worth, let’s invert the calculation to see whether the implied market expectation is reasonable.

The easiest way to do this is by using the reverse DCF method.

To be on the conservative side, I will use FCF numbers instead of owner earnings which includes all changes in working capital. 2009 was the only year were FCF dipped drastically below $100m. 2010 and 2011 saw the FCF move back up in line with the $100m range.

The average FCF over 10 years is $113m but I will stick to the lower end of the range and use $95m.

Here is what I get:

  • Starting FCF: $95m
  • Discount rate: 15%
  • Current market price: $1.16
  • Implied FCF growth to arrive at $1.16: -64%

My opinion is that the market is inefficient with respect to LEE.

Disclosure

Author of this article is long LEE.

About the Author

A web programmer from Omaha and a father of three.  I have been trading stocks since 2001 (just after the dot.com bubble popped).  I have 17 books published of which, the majority are on the stock markets and investing.  I usually become more active in stock trading during crisis moments when people are running for the exits.

  • Awesome post! This is definitely a very interesting stock. As Buffett said a few weeks ago: “Free news won’t last.”

    I agree that the general trend toward free news online will diminish over time. I think these companies will start to realize that subscription rates for news, rather than monetization from traffic and ads will stand the test for the ultimate news business model.

    I also feel that the transition of paper news to digital news might actually increase profit margins in the long run. If they aren’t increased I’ll bet they won’t decrease much.

    Last, I love the moat associate with regional news. I might take a bite of this stock. Thanks for the great analysis.

  • Pingback: Warren Buffett, Berkshire Hathaway and Lee Enterprises « Books and Publishing Information by Frank Tudor()

  • Thanks for the kind words. This is really the quintessential value stock and a big deal (and we can all take part in it today). Also today Buffett has disclosed his actual ‘share count’ (I copied the link in below). This is not the debt ownership component. So now the tally as of today is 7.4% of the company ownership (he is going to keep buying and buying (so hold on to those shares)).

    I have noticed big blocks of shares being purchased (kind of under the radar). For example there was a block of 30,000 shares purchased at 9:05 @ $1.13 per share this morning (but today is not the only day, there have been many days of green candles meaning it is under accumulation (albeit subtle accumulation)). The stock is being artificially held down. I am not sure how this is possible, but the attention the stock is getting today may cause the stock to go parabolic tomorrow. If the stock breaches $1.30 per share then we should see a clear path to $2.50.

    One other gem of information. This stock is not a major component of any ETF (of any importance). Only three ETFs have LEE as a component which barely amounts to $100k of total holdings, which brings me to some important points to consider.

    1. We have a natural stock unaffected by the volatility of the markets.

    2. Big players can’t damage the value per share other than going directly short on the stock (without hiding behind an ETF these traders are extremely exposed).

    2. Short interest has recently increase but they have 5 days to cover. I would not want to be short this stock under the current circumstances (can you imagine the consequences).

    Again, shorting LEE at this point is suicide. Berkshire can shut any dark pool or hedge fund down in the blink of an eye. More likely, they can make a phone call and ask them nicely to leave the stock alone. There are so many other profitable ETFs and raw stocks to decimate.

    http://www.timesleader.com/stories/Buffetts-company-discloses-Lee-Enterprises-stake,159780

    Disclosure: I have increased my position in the last 24 hours and will do so again in the next week or so.

    I have also forwarded this article on to PR at Lee Enterprises (and talked to them on the phone Friday last week), it is very likely that the upper echelons have already read it over. Let’s see if it generates some more insider buying. Our confidence in the company is their confidence in us and we are value investors…We are the good guys. :)

  • Holy god. The stock just rallied 30% after hours. Elation! I hope people that read this had time to open a position.

  • Next stop $2.50 a share, then $5.00.

  • definitely good timing!

  • Pingback: Lee Enterprise (LEE) has a new price channel « Books and Publishing Information by Frank Tudor()

[checklist-collection]
[checklist-collection]