Guest post by
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.
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.
- 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.
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.