Journal Communications: Broadcasting a brighter future
There’s a joke that’s been repeated ad infinitum since investors began investing: How do you make a small fortune? (Drum roll, please.) Start with a large fortune.
The joke’s no longer a rib-splitter (and probably never was), but it’s not the reason long-time Journal Communications, Inc. (NYSE: JRN) shareholders aren’t smiling. After going public in September 2003 at $16 per share, Journal’s stock spent the next five months skipping north to $20. From that not-so-lofty peak, though, it’s been a slow, steady slog south to $10 and change.
Journal is suffering from the same chronic contagion afflicting most print-journal enterprises—declining readership, weak ad revenues and Internet competition.
But maybe Journal should be receiving better treatment than its broadsheet brethren. Yes, newspaper publishing (led by the Milwaukee Journal Sentinel) is a major segment, comprising 49% of revenue and 35% of operating earnings, but that makes Journal far from a pure-play newspaper. Other segments—radio and television broadcasting, printing services and “other”—comprise 51% of revenue and 65% of operating earnings.
Of the majority triumvirate, broadcasting is the most promising and is the segment management is most actively managing. On the radio front, stations have swelled to 36 (mostly in the Midwest) from 19 in the past eight years—the goal being to acquire and align the stations in clusters within a market, building out the cluster to offer distinct solutions for sundry advertisers in any given market.
On the television front, expansion has occurred at an ever faster rate. At current count, Journal owns 11 stations in the Midwest, West and South (up from three in 1999). Four are affiliated with ABC, three with NBC, two with Fox, one with CBS and one with UPN: The goal being to increase locally produced programming stations and related Internet revenue.
As broadcasting grows, publishing shrinks. The Ohio and Louisiana publishing operations are gone, and the Connecticut and Vermont operations will soon follow. Once all the “I’s” are dotted and the “T’s” are crossed, Journal’s publishing group will be focused on Wisconsin and Florida. Both markets will be leveraged by several websites operating under the popular Journal Interactive brand. (Though still small, Journal Interactive’s add revenue has increased an average of 38% per year over the past two years.)
The transformation has been tactile. Since 2001, broadcasting has grown from 17% of revenue and 12% of operating earnings to 35% of revenue and 61% of operating earnings, while operating margins have swelled to 57%—a full 10 percentage points higher than publishing’s.
That said, the realignment remains a work in progress. In July, Journal reported that second-quarter net earnings dropped to $14.2 million, or $0.21 per share, compared with $15.2 million, or $0.22 per share, in the same year-ago period. Revenue for the quarter slipped to $147.5 million, down 4.3%, from $154 million in the previous year. (Revenue will likely decline through 2007, as the company continues to divest incompatible parts from its empire.)
So what is Wall Street’s take on management’s machinations? Opinions are mixed. Robert W. Baird & Co. analyst Mark Bacurin has reduced his 2007 earnings estimate by $0.05 to $0.68 per share and trimmed his 2008 estimate by $0.06 to $0.85 per share. His 12-month price target remains $16 a share, 14% greater than the $14.00 52-week high.
Goldman Sachs analyst Peter Salkowski believes the company is likely to benefit from improved broadcast results in 2008.
“While we are disappointed by second-quarter broadcast results, we expect the segment to improve later this year and into 2008 as political ad dollars begin to flow,” he said in a recent note.
Salkowski’s 12-month price target is $14 per share, based on 2008 and 2009 EPS estimates of $0.83 and $0.74, respectively.
Craig Huber of Lehman Brothers is the growling bear of the group. Thanks to lingering concerns over contracting retail ad sales. Huber has reduced his 2007 earnings estimate by $0.03 to $0.58 per share. Moreover, he has shaved his 12-month price target to $9 from $10 per share.
“Two for, one against” would suggest the odds favor going long, especially when considering downside risk constitutes a 13% decline (Huber) while upside potential constitutes a 33% or 52% (Salkowski or Bacurin) rise.
But Journal’s cash-generating ability increases the upside odds. In 2005, long-term debt soared to $275 million in order to fund acquisitions. Since then, long-term debt has been amortized to today’s $118 million. Meanwhile, cash from operations funds a $0.30 annual dividend per share (recently hiked 15.4%), providing a 2.9% yield and a continuing share buyback program (12 million shares have been repurchased through August).
So what are the risks? The obvious risks are that circulation declines continue unabated, the rate of Internet advertising growth slows to a crawl and the expected advertising bonanza from the Olympics and next year’s political invectives never materializes.
Less obvious is opportunity cost. Time is money. Perceptions change, to be sure, but the process can be slow and imperceptible, especially for old-line businesses like print and broadcast media. In layman’s terms, it could be longer than expected before Journal’s shareholders crack a smile at the aforementioned fortune joke (if they were to crack one at all).
