November 30, 2011 - 12:41pm EST by
2011 2012
Price: 4.00 EPS $0.00 $0.00
Shares Out. (in M): 51 P/E 0.0x 0.0x
Market Cap (in $M): 204 P/FCF 5.5x 4.5x
Net Debt (in $M): 73 EBIT 61 74
TEV ($): 277 TEV/EBIT 4.5x 3.7x

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Journal Communications (JRN) is a TV broadcaster and newspaper publisher that has been ignored by the market which considers the Company simply a newspaper publisher. Strong growth (especially from political advertising) over the next few quarters will help crystallize the value of the Company and the stock could be worth ~$7 (75% above current levels) as the current 25% FCF yield comes down to more reasonable levels. If the Company can realize the value of the sum of its parts, the stock could be worth ~$8.50 (110% upside from current levels). Additionally, the Company recently announced a buyback which would allow them to buy back ~22% of their stock over the next 18 months.
Company Overview:
  • Publishing (49% of revenue, 34% of EBITDA) consists largely of the Milwaukee Journal Sentinel which contributes 83% of Publishing revenue. The Journal Sentinel is the dominant paper in Milwaukee and is the dominant local paper with the highest population penetration of any paper in the top 50 DMAs. Aside from the Journal Sentinel, the Publishing group also publishes community newspapers and shoppers in Wisconsin and Florida.
    • Because of the strength of the Sentinel in Milwaukee, JRN newspaper revenue has been a bit stronger than industry trends the past four years (see below).
    • Note the political upheaval in Wisconsin (around collective bargaining legislation and the resulting battles over legislator, and now governor, recall efforts) has helped support circulation levels as local political news is extremely relevant.
      • Newsprint costs, which are ~15-20% of total costs have been rising, but due to generally declining circulation and page counts, overall spend on news print has been increasing only moderately (which suggests lower GM%)
  • Broadcasting (51% of revenue, 66% of EBITDA) is comprised of 33 radio stations and 13 television stations in 12 states.
    • TV (accounts for 65% of broadcasting revenue) is in mostly second and third tier cities and they have big 4 affiliations with 10 of their 13 stations (3 NBC, 4 ABC, 2 FOX and 1 CBS). They have affiliations with NBC in Milwaukee and ABC in Las Vegas.Radio (35% of broadcasting revenue) is in mostly third tier cities. The exception is Milwaukee where they have the #1 rated station in the DMA.
    • While in the extremely difficult newspaper market, JRN outperforms peers, in the more stable broadcast market, they perform roughly in-line with the industry. This is largely a reflection of the middling rankings of the majority of their stations as marginal stations have struggled to attract advertisers during the past few years. On the TV side, marginal stations are unable to attract retrains revenue which has helped offset any advertising weakness at peers..
  • Politcal advertising has the potential to provide a huge tailwind for the Company. Given the cycle-to-date fundraising levels, independent analysts I have spoken with are expecting political ad spend to be 15-20% above '08's record levels. Much of this will continue to go to local broadcasters like JRN. Additionally, Wisconsin has become a key battleground state with presidential, congressional and local implications. The mid-year recall campaign against GOp legislators was estimated to cost ~$40MM (v more traditional off-cycle political spending of ~$2MM). Activist groups are already mobilizing for a gubernatorial recall effort which will be similarly passionate (and expensive) and will lead to nice tailwinds for WI based JRN.

Industry Background

The traditional media industry is obviously under pressure from newer forms of advertising. Newspapers in particular have seen advertising revenues cut in half in just the past four  years. The outlook for newspapers isn’t particularly hopeful, but may see declines stabilize in the low-mid single digit range.  Broadcast TV has been more stable, down 8% over the past four years and is looking to begin growing mid-single digits going forward. Broadcast radio is down 25% in the past four years although it is expected to stabilize and grow low single digits going forward.

  • Drivers of Industry/Company Fundamentals:
    • In broadcasting Auto is ~1/4 of total revenue while telco is another 10%. The lagging auto sector has provided a headwind for as revenue but it has just recently turned positive for JRN.
    • Political spending is also a huge driver for broadcasters. With ’12 expected to be another record breaking season for ad-spend this should benefit broadcasters (also note WI is a battleground both in national elections as well as wrt recent tumult in Madison and Supreme Court elections as well as any potential recall races).
    • In publishing segment, the largest advertisers are retail advertising, telecom and films as well as the separate classified segment. Advertiser consolidation (ie among retailers or telecom firms) is generally negative for the space and the higher margin classified business is obviously impacted by online media like Craigslist and While retailers are unlikely to completely migrate away from newspapers, classified may be under a broader secular threat (ie help wanted and real estate, two of the largest classified categories have fallen at 17% and 10% CAGRs over the past four years although this has been partially offset by a 25% increase in “other” classified ads throughout the industry.)
      • Very recently newspaper share of ad expenditures has started to flatten out and has actually increased the past three months (up 300 bps YoY). While this doesn’t suggest newspapers are a growth category, it may mean that the declines will begin to moderate.
    • M&A could provide a tailwind for valuations. Due to high cash flow generation of these businesses, they have generally commanded premium multiples. Newspapers have a 10 year M&A comp average ~11x (~10x over past five years and ex Dow Jones). Broadcasters have similarly commanded a high multiple (~13.5x over past 10 years, recent txns closer to 11x). Any pickup in M&A would generally be a positive catalyst for the space.
    • FCC regulation is a potential driver for value here. The uncertainty around new ownership rules (which have been proposed and then stayed pending appeal) has been a brake on M&A. Also, the National Broadband Plan is contemplated to involved reallocating TV spectrum for wireless broadband. The distribution mechanisms for this are unclear, although it may present a potential source of value for broadcasters. 
      • In March FCC proposed a retrains settlement mechanism which wouldn’t force broadcasters to arbitrate must-carry disputes which is positive for broadcasters as it allows them to maintain their leverage wrt MSO’s.
      • NBP proposes to reallocated 120Mhz of spectrum from broadcasters (~1/3 of total broadcaster spectrum). Plan proposes either voluntary auctions or if that doesn’t work, repacking the channels to share frequency. In Q410 a framework was introduced to establish auction format and parameters. This would require Congressional approval and NAB is opposing it, but could provide a source of value for broadcasters.
        • Really rough back of the envelope numbers suggest JRN may have total spectrum inventory of ~21MM Mhz/PoP. If they need 1/3 of that for transmission that’s 14MM Mhz/Pop excess spectrum and the recent 700 Mhz spectrum auction went for ~$1.25/Mhz PoP which suggests excess spectrum inventory could be worth ~$18MM to JRN.
Valuation here is extremely compelling. The Company trades at ~4x blended '11/12 EBITDA which is well below peers as per below.
Valuation (In   MM$)   2007 2008 2009 2010 2011E 2012E
Price   $4.00 Revenue $483.9 $451.4 $365.5 $376.8 $366.0 $381.6
FD Shares 51.0 EBITDA 99.7 76.5 55.2 76.8 61.0 74.0
Market Cap $204.0 EBITDA-Capex $65.9 $55.7 $47.6 $67.4 $50.6 $62.0
Net Debt   73 EV/EBITDA       3.6x 4.5x 3.7x
Enterprise   Value $277.0              
Pure-play broadcasters trade ~8x blended EBITDA while publishers trade in the 3-4x range. This suggest JRN is being valued as a publisher and being given no credit for their broadcasting operations.
        2010 2011 2012  '11/12 blend    
Comps   Market Cap Net Debt EBITDA EV/EBITDA EBITDA EV/EBITDA EBITDA EV/EBITDA EV/EBITDA     Publishing /bcast /other 
Media General    $             83.0  $          614.0  $        125.1 5.6x  $        80.4 8.7x  $       88.6 7.9x 8.2x   49/45/6
Nexstar    $           230.0  $          615.0  $        118.0 7.2x  $     100.8 8.4x  $     140.7 6.0x 7.0x   0/100/0
Lin TV    $           185.0  $          602.0  $        143.6 5.5x  $     118.0 6.7x  $     152.0 5.2x 5.8x   0/100/0
AH Belo    $             90.0  $          (50.0)  $          34.0 1.2x  $        36.0 1.1x  $       42.0 1.0x 1.0x   100/0/0
SBGI    $           820.0  $      1,020.0  $        241.0 7.6x  $     222.0 8.3x  $     265.0 6.9x 7.6x   0/100/0
Belo    $           590.0  $          886.0  $        243.0 6.1x  $     201.0 7.3x  $     252.0 5.9x 6.5x   0/100/0
Gray    $             94.0  $          815.0  $        138.0 6.6x  $        96.0 9.5x  $     147.0 6.2x 7.5x   0/100/0
Gannett    $       2,560.0  $      2,188.0  $    1,282.0 3.7x  $  1,193.0 4.0x  $ 1,290.0 3.7x 3.8x   75/23/2
Lee    $             33.0  $      1,002.0  $        170.0 6.1x  $     181.0 5.7x  $     188.1 5.5x 5.6x   100/0/0
Average         5.5x   6.6x   5.4x 5.9x    
JRN    $           204.0  $            73.0  $          76.8 3.6x  $        60.0 4.6x  $       74.0 3.7x 4.1x   48/52/0
The sum of the parts here is compelling. Once the market realizes the unappreciated value of the broadcasting operations, the stock could revlaue. A conservative sum of the parts valuation suggests fair value ~$8.50 (110% upside from current levels).
Sum of Parts:                
10-'11 blend bcast EBITDA $ 50.80 10-'11 blend publishing EBITDA $ 28.30    
Multiple Value     Multiple Value   Total Value Equity Price
5.5x $279     2.5x $71   $350   $ 5.43
6.5x $330     3.5x $99   $429   $ 6.99
7.5x $381     4.5x $127   $508   $ 8.54
8.5x $432     5.5x $156   $587   $ 10.09
9.5x $483     6.5x $184   $667   $ 11.64


-Strong '12 driven by record political revenue will provide a boost to FCF
-Existing repurchase authorization can allow the Company to repurchase ~22% of existing stock over the next 18 months
-Recent M&A in broadcasting provides real comps to revalue their broadcasting operations
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