|Shares Out. (in M):||59||P/E||4.8||0|
|Market Cap (in $M):||115||P/FCF||1.5||0|
|Net Debt (in $M):||554||EBIT||0||0|
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"There are few assets so bad that they can't be a good investment when bought cheap enough."
- Howard Marks
I frequently find that you make way more money when things go from truly awful to merely bad than you do when things go from good to better. That's why I currently own shares of Lee Enterprises, a business facing powerful secular headwinds with a leverage problem, to boot.
LEE is a newspaper publishing company operating primarily in the Midwest, Mountain West, and West regions of the United States. LEE operates across 21 states and focuses on small/mid-size markets that are regional shopping hubs with established retail bases. Note that LEE operates with a fiscal year ending in September. jdr907 wrote up LEE a little over a year ago (marking LEE's first appearance on VIC) and does a nice job describing the business in more detail so I will not repeat all that here. Since jdr907's write-up, things have gone from truly awful to merely bad, yet the stock price has not reflected that.
Most LEE markets are midsize, regional hubs where LEE's digital and print media are the dominant sources of local news, information and advertising with very little, if any, print competition. In their markets, LEE has more reporters, photographers and sales people on the street than all of their competitors combined. A competent management team has done a nice job managing costs, creating a company with margins that significantly outpace the industry average (by several hundred bps).
Positive developments over the past 1.5 years -
1) Increased cash cost cuts
Management first guided for 2017 cash cost takeouts in December of 2016. In the three quarterly reports since the original 2017 guide, management has increased this guidance in every quarter. Obviously this game can't go on forever, but management is very confident they can continue to take cost out of the business through 2018 and beyond, and will be giving formal guidance for further cost takeouts in 2018 on the next earnings call.
2) Accelerated repayment of most expensive debt
LEE is 3.7x levered and as such, does not pay a dividend, unlike most other public newspaper publishers. Moreover, LEE's weighted average cost of debt is ~9%. As a result, all of LEE's FCF is absorbed by interest payments / debt paydown. Since 2011, LEE has paid down >$500m in debt (vs a market cap of $115m today).
The end of the March quarter marked a significant change that will accelerate the repayment of LEE's highest cost of capital, the 2nd Lien term loan, which carries an interest rate of 12%. Beginning in April, 2nd Lien lenders no longer had the option to decline excess cash flow payments at par. Going forward, management now has the ability to use Pulitzer excess cash flow to forcibly amortize their most expensive issue, which they are eager to do. Given the high interest rate on this debt, these excess capital payments will accelerate interest savings in the future. This acceleration in interest savings will contribute toward FCF stability even if the topline continues to be weak. This is all part of a virtuous cycle in which debt reduction results in more interest expense savings, which are used to further reduce debt, gradually transferring value to the equity holders. Finally, management announced on the Q3 conference call that they have begun evaluating the timing and economics of refinancing all or a portion of the company's long-term debt. This is the first time management has made this announcement, which they left out of the press release.
The bulk of LEE's debt does not mature until 2022. Cash plus availability under a revolving facility brings liquidity to just under $60m currently vs $32m of required payments over the next 12 months.
- continued debt paydown
- real estate monetization
- accelerating subscription revenue growth
- sector m&a
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