In August of last year, I took a look at Daily Journal Corp. (DJCO, Financial) to try and see if the business had potential as a value investment.
After taking a look at the value of the group's investment portfolio and its relatively small legacy publishing business, I concluded that the shares were fairly valued at the time, considering the level of the rest of the market.
However, my analysis did not consider the growth potential of the equity portfolio or the intellectual property value of the legacy business. With these things in mind, I decided that a re-assessment was in order.
Intellectual property value
The intellectual property value of the legacy business is the most complicated asset to value here. Daily Journal's legacy business is a legal newspaper. The income potential of this asset has been declining for years, but the company has been branching out. It is developing software for the legal profession and courts, which is taking time and costing a lot of money.
The process is taking time and costing money because it is complicated, but Daily Journal has an advantage because it has deep connections in the legal industry, and it has been covering the sector for decades. The company knows what can be improved and where it needs to go to get it done.
How much is this knowledge worth? I cannot say. I think it would be hard for any analyst to value this information as it is entirely intangible. The value of these assets is an unknown variable that I have to take into account when analyzing the firm's potential.
To provide some indication of how much these intangible assets could be worth, we can look to the firm's 10-K for the fiscal year ended Sept. 30, 2021. Commenting on the performance of the technology business, or Journal Technologies, the 10-K noted:
"For Journal Technologies, there have been several delays or cancellations in government procurement processes. Also, although we have been able to complete some existing projects remotely, we have been unable to finish certain implementations and trainings because of our inability to work with clients in-person. Given that we are typically paid for implementation services upon 'go-live' of a system, receipt of those revenues has been delayed."
I think this indicates just how vital these intangible assets are for the group, and how they cannot be replicated through other means. Face-to-face time with experienced individuals using complex software is the company's competitive advantage.
Revenue analysis
In my previous article, I used revenues from the operating business to try and estimate the value of this side of the enterprise as this excludes dividend income and portfolio-related expenses such as margin loan costs.
Overall last year, the company reported income from operating activities of $2.2 million. On top of this, dividends and other income totaled $3 million.
Total revenue fell from $49.9 million in fiscal 2020 to $49.4 million for fiscal 2021. As well as this business, the company also reported marketable securities worth approximately $347.6 million.
At the time of writing, the stock has a market capitalization of $447 million, suggesting the operating business is valued at $99.4 million, or two times sales.
The question is, how should one value the operating business? Daily Journal has provided the answer itself. In its 10-K, the organization notes:
"The Company is not a smaller version of Berkshire Hathaway Inc (BRK.A, Financial) (BRK.B, Financial). Instead, it hopes to be a significant software company while it also operates its Traditional Business."
In this case, one could argue that the business should be valued compared to peers in the software sector, since this is where it is pinning its hopes for future growth. The U.S. software sector is selling at a price-sales ratio of around 10. This suggests Daily Journal's operating business is deeply undervalued.
These figures are only rough estimates. They are not designed to analyze the corporation's intrinsic value comprehensively. They are only designed to provide a ballpark figure based on available information.
Still, based on the above, I do not think that it is unreasonable to say Daily Journal looks cheap at current prices.
