A.H. Belo was spun off from Belo Corp. on February 8, 2008. A.H. Belo owns three major daily newspapers: The Dallas Morning News, The Providence Journal and The Press-Enterprise.
These are the arguments why A.H. Belo would be a good investment:
1. Low valuation: A.H. Belo trades at EV / Sales of 0.1 and EBITDA / EV of 66.3 percent. It has the lowest valuation in comparison to its competitors. (Note 1, page 4 - 6)
Price / share EV / Sales EBITDA / EV
Gannett $16.87 1.1 24.4%
New York Times $12.66 1.1 12.7%
Media General $12.62 2.1 -3.8%
McClatchy $4.61 1.4 18.2%
Washington Post $597.00 1.2 12.6%
Daily Journal $40.52 1.2 20.7%
Lee Enterprises $3.49 1.5 15.4%
Average 1.4 14.3%
2. Sale of Newsday: Newsday is sold to Cablevision for $650 million. Newsday sales for 2006 was $541 million, which valued Newsday at price / sales of 1.2.
3. Private market value of Tribune: Tribune was taken private in December 2007 at EV / Sales of 2.4 and EBITDA / EV of 10.1 percent. (Note 2, page 7)
4. Free newspapers: At the current price of $5.83 per share, EV of A.H. Belo is $102.5 million. A.H. Belo owns a number of properties, which are valued at $151.2 million. After 25 percent haircut, the properties would be worth $113 million. This means the three dominant newspapers with $724 million of sales and $68 million of EBITDA are free. (Note 3, page 8)
5. Significant margin of safety: A.H. Belo is trading at 60.0 percent discount to expected value of $298.7 million or $14.57 per share. Expected value is calculated using the following assumptions: (a) 75 percent probability that A.H. Belo trades at EV / Sales of 0.55 and (b) 25 percent probability that it goes bankrupt. This is conservative as EV / Sales of 0.55 is half of the lowest EV / Sales ratio of its competitors, which are Gannett and New York Times. Likewise, assigning 25 percent chance of bankruptcy is conservative, as A.H. Belo has no debt and owns a lot of properties.
6. Presence of competitive advantages on local news and information: The Dallas Morning News is located in the center of North Texas and is the 10th largest daily and 13th largest Sunday newspaper in the country. It is the only main daily in Dallas. Its closest and longest-lived rival, The Dallas Times Herald, went out of business in the 1992. The Providence Journal is the largest content provider of local news and information in the Southeastern New England region while The Press-Enterprise is the largest daily newspaper in Inland Southern California. (Note 4, page 9)
7. Experienced and shareholders-aligned management: Robert Decherd is a fourth-generation of founding family member and acts as the Chairman, President and Chief Executive Officer of the new A. H. Belo. Decherd is one of the longest-tenured CEOs in the media industry in the United States, having worked for Belo since his graduation from Harvard College in 1973 and serving as CEO since January 1, 1987. Management has a significant equity stake in the company; 15.3 percent of total outstanding shares. (Note 5, page 10)
8. Supply/demand imbalance: Index funds own approximately 16% of Belo Corp. As A.H. Belo is not one of the components of the S&P 900, S&P 1000 and S&P MidCap 400 indexes, its shares would be sold regardless of its fundamentals.
9. Lack of analyst coverage: Being a newly spun off company, A.H. Belo does not have analyst coverage. This lack of coverage would ensure low demand for its shares in the short term.
10. Catalysts: When analyst starts covering A.H. Belo and the selling pressure from index funds is gone, A.H. Belo should trade higher.
These are the arguments why A.H. Belo would be a good investment:
1. Low valuation: A.H. Belo trades at EV / Sales of 0.1 and EBITDA / EV of 66.3 percent. It has the lowest valuation in comparison to its competitors. (Note 1, page 4 - 6)
Price / share EV / Sales EBITDA / EV
Gannett $16.87 1.1 24.4%
New York Times $12.66 1.1 12.7%
Media General $12.62 2.1 -3.8%
McClatchy $4.61 1.4 18.2%
Washington Post $597.00 1.2 12.6%
Daily Journal $40.52 1.2 20.7%
Lee Enterprises $3.49 1.5 15.4%
Average 1.4 14.3%
2. Sale of Newsday: Newsday is sold to Cablevision for $650 million. Newsday sales for 2006 was $541 million, which valued Newsday at price / sales of 1.2.
3. Private market value of Tribune: Tribune was taken private in December 2007 at EV / Sales of 2.4 and EBITDA / EV of 10.1 percent. (Note 2, page 7)
4. Free newspapers: At the current price of $5.83 per share, EV of A.H. Belo is $102.5 million. A.H. Belo owns a number of properties, which are valued at $151.2 million. After 25 percent haircut, the properties would be worth $113 million. This means the three dominant newspapers with $724 million of sales and $68 million of EBITDA are free. (Note 3, page 8)
5. Significant margin of safety: A.H. Belo is trading at 60.0 percent discount to expected value of $298.7 million or $14.57 per share. Expected value is calculated using the following assumptions: (a) 75 percent probability that A.H. Belo trades at EV / Sales of 0.55 and (b) 25 percent probability that it goes bankrupt. This is conservative as EV / Sales of 0.55 is half of the lowest EV / Sales ratio of its competitors, which are Gannett and New York Times. Likewise, assigning 25 percent chance of bankruptcy is conservative, as A.H. Belo has no debt and owns a lot of properties.
6. Presence of competitive advantages on local news and information: The Dallas Morning News is located in the center of North Texas and is the 10th largest daily and 13th largest Sunday newspaper in the country. It is the only main daily in Dallas. Its closest and longest-lived rival, The Dallas Times Herald, went out of business in the 1992. The Providence Journal is the largest content provider of local news and information in the Southeastern New England region while The Press-Enterprise is the largest daily newspaper in Inland Southern California. (Note 4, page 9)
7. Experienced and shareholders-aligned management: Robert Decherd is a fourth-generation of founding family member and acts as the Chairman, President and Chief Executive Officer of the new A. H. Belo. Decherd is one of the longest-tenured CEOs in the media industry in the United States, having worked for Belo since his graduation from Harvard College in 1973 and serving as CEO since January 1, 1987. Management has a significant equity stake in the company; 15.3 percent of total outstanding shares. (Note 5, page 10)
8. Supply/demand imbalance: Index funds own approximately 16% of Belo Corp. As A.H. Belo is not one of the components of the S&P 900, S&P 1000 and S&P MidCap 400 indexes, its shares would be sold regardless of its fundamentals.
9. Lack of analyst coverage: Being a newly spun off company, A.H. Belo does not have analyst coverage. This lack of coverage would ensure low demand for its shares in the short term.
10. Catalysts: When analyst starts covering A.H. Belo and the selling pressure from index funds is gone, A.H. Belo should trade higher.
